Interest Rates
US bond rates reversed the recent trend over the past month after Chairman Powell mid-Friday indicated the Fed can be patient in determining its next course of action and that the economy was stable. This was despite an earlier softer payrolls report that had moved rates lower. At close Friday, the 10-year treasury was 4.30%, a rise of 0.10% for the week. The market had been pricing in three Fed rate cuts for 2025, a rise from only one cut expected in early February. This highlights the volatility of expectations which is displayed via the MOVE index (bond equivalent to the VIX) hitting post US election highs.
Huge rises in European bonds after Germany announced a EUR500 billion fund to revamp its military. German, Italian and French 10-year bond rates all jumped by more than 0.40%. British bonds only rose by 0.15% like US yields, highlighting a benefit of Brexit in being out of the Euro influence.
There was little news on the Australian bond rate front with rates across the curve rising in line with US yields, 10-year commonwealth government bonds also rose by 0.10% to 4.41%.
Major Credit Markets
US investment grade (IG) markets are still in good shape despite derivative iTraxx markets moving wider (more cost for protection). In March, all IG sub-sectors are rallying, in particular Automotive, Utilities and Technology.
Australian IG credit market spreads continue to gradually move wider, although still close to lows. The widening moves simply reflecting a rise in general market volatility and some small weakness in global high grade credit markets. Issuance was very active in the week even outside the banks with Transgrid, Alumina, Nestle and Transpower NZ each issuing AUD bonds and all met with large demand, pushing margins in tighter during book builds. In the financials, HSBC issued a 10NC5 FRN at BBSW+1.87% and CBA a large USD5bn five-part senior and sub notes sale, the senior bonds at 45 pts for the 3-year and 55 pts for the 5-year. These USD margins translated into AUD at 67 and 87 pts, respectively.
High Yield Markets
US high yield continues to be weak given the equity market volatility and economic uncertainty in the US, however this was partly stemmed late in the weak after Chairman Powells remarks as cited above. The recent weakness in HY spreads has been most felt in the Automotive sector, despite IG spreads in this sector being strong, highlighting the effect of tariffs is different across various car makers, the largest being best placed.
Hybrids rallied over the week mainly driven by many ex-dividend events and the usual partial keeping of franking credits. The average major bank hybrid margin fell by 0.11% over the week to 1.89%, close to 2025 lows in early January. Volumes have kicked higher, the average daily volume at $38m concentrated in all short-term issues as investors continue to move out of short hybrids for alternative yield products. This makes no sense, selling a hybrid with a 2% margin (like long term hybrids) and the benefit of low credit duration during volatile times for a longer dated yield product is a recipe for capital loss should volatility increase (see more below).
Listed Hybrid Market
Hybrid – investors giving up safe yield.
CBA has until March 15 to announce intentions to call CBAPG which has an optional repayment date of April 15. Given a reinvestment offer would require more time than one month in the marketplace, it looks like CBA will simply repay as ANZ recently did with AN3PH. Note the AN3PH $930m face value is repaid on March 20. Similarly, the CBAPG $1.3 bn face value would hit bank accounts on April 15. These two redemptions should keep secondary hybrid spreads very firm into April/May. There are only three other hybrids with maturities in 2025: WBCPH, $1.69 bn in September and in December AMPPB ($275m) and MBLPC ($641m). In a sector that measures fairly vs sub notes and senior bonds, investors are mad to be giving up yields from major banks that have had their credit profiles improved by APRA’s actions. The chart below compared the current major bank hybrid curve with that in mid- December., just after the APRA news flow regarding cessation of hybrid issuance. The blue dots with labels are the current curve and the red dots the corresponding hybrids margins in mid-December. Note the curve changes. The average margin spread for each date was about the same, however short-term hybrids have risen in margin and longer dated bought. This was discussed above, reflecting investors selling for alternative products. Unless these products are funds with a lower risk profile and higher yield (like the Arculus Preferred Income fund), the trade is very mis-leading and gives up secure short-term yield.
Forward Interest Indicators
Australian rates
Swap-rates rise with bond rates.
Swap rates:
- 10-year swap 4.40%
- 7-year swap 4.21%
- 5-year swap 4.04%
- 1-month BBSW 4.09%
