Australian Bond Exchange

ABX Weekly 10th October 2018 Market update

A slew of positive data points out of the US has bumped yields higher. But that means analysts are starting to have concerns that the share market is due for a correction. We’ve seen this in flows as a flight to quality, as investors derisk and invest into something safer.

The Italian budget proposal was rejected putting more strain on the European market. Sending even more interest into the Australian investment space.

Brewin’ with Nguyen

Pop quiz, which of these bonds from the same company would you rather invest in?

Bond A: 3-year bond with a 3.00% coupon at price $94.50

Bond B: 3-year bond with a 10.00% coupon at price $113.77

I had an interesting conversation with a client who only wanted to purchase bonds under par ($100) and I wanted to demonstrate that the price of the bond isn’t as important as the Yield to Maturity (YTM) is. As you might guess both those bonds have the same YTM of 5%. Meaning if you hold the each of those bonds you would get a return of 5% each year on your investment.

But now say Bond B had a price of $113.00 and YTM of 5.27%. My client wouldn’t entertain the idea of Bond B even though it has now a higher YTM than Bond A.

Whether you pay a premium (above par) or have a discount (below par) on the bond just repositions when you get your value of the bond. Bond A gets its value at the end of the life of the bond date when it pays $100. Whereas Bond B value is paid off every 6 months with the coupon payment as you receive the higher coupon rate.

The YTM is what lets bondholders sleep easy at night as you know what return you’re going to get for your hardearned money

European Desk

I just came off the plane from my two-week trip to visit my Swiss and German clients and thought I would share some impression with you. It is hard to believe that investors in Europe have now endured more than six years of negative interest rates and the financial system is slowly showing some signs of stress in the form of lower pensions and negative return on cash. Imagine this, you have a bank account and you firstly don’t earn any interest and secondly the bank is charging you to hold your money! I also hear from some pension funds that they are happy to lend money to a council to build a road and the pension fund actually pays the council to take the money. I also went on to the floor of the Frankfurt Stock exchange and saw firsthand, how our Australian Bonds are traded in Europe. European investors are getting very interested in our bonds as the interest rate differential is attractive and the current weakness in the A$ makes it even more exciting.

ABX Colour:

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Where does your risk appetite lie?  ABX weekly 10/10/2018


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