Words fail me when asked to explain what the RBA was thinking, but here is what the media have reported:
- RBA interest rate cut: governor Michele Bullock says the board weighed up both sides. But did the Reserve Bank deliver the first cut in more than four years because it should have, or because it had to?
- Interest rates: RBA rate cut more about politics than economics
- Cost of living Australia: Crisis will continue because the Reserve Bank cut interest rates while inflation remains elevated
Even before the ink has dried on the RBA’s politically driven rate cut, we have the announcement on Sunday of the ALP and Coalition plan to expand Medicare by $8bn. The plan, which will be fully supported by the Greens/Teals, is intended to cover the current gap between the bulk billing rate and the total fee charged by any GP. It is nationalising private health care. Much like the NBN and the NDIS this is an uncosted, uncapped, and unfunded policy. It will be inflationary as it boosts household spending power at time of full employment and when inflation is still well above the target set by the RBA at 2.5% (Governor Bullocks speech).
The political class are putting their own welfare well ahead of the welfare of all Australians, but we must remember that inflation hurts those on fixed incomes (pensioners) and the less affluent. The less affluent do not have mortgages as they cannot afford to buy a home that is increasing in value like those that this RBA interest rate cut aids.
Interest Rates
Bond yields moved in a tight range up until the Michigan Consumer expectations survey on Friday night that was weaker than expected, triggering a fall in the 10-year yield to 4.43%. The move in the 2 year was also down from 4.25% to 4.19%. The market appears to be focused on the negative GDP growth implications of the DOGE cuts to Fiscal spending without also looking at the impact of all the other Trump Admin policies.
Australian bond rates underperformed the US last week. The Australian 10-year bond moved from a 10bp discount to the US 10 year to a small premium. In any case solid buying in the 3–7-year part of the curve likely reflects the demand from Australian fixed duration managers that have a benchmark of 5.25 years. There was some selling of the 10–30-year part of the curve that may reflect some profit taking related to the currency rally post the hawkish RBA speech.
Major Credit Markets
US investment grade (IG) markets remain strong with the volume of issuance in some major global markets at all time total highs (Europe so far in 2025). U.S. business activity nearly stalled in February amid growing fears over tariffs on imports and deep cuts in federal government spending. Such risk factors are not priced in and hence any jump in inflation or poor economic numbers will negatively impact extremely tight credit spreads.
Australian credit margins generally tightened with solid demand not offset by meaningful supply. The only new issue of note was the $2bn UOB (United Overseas Bank Sydney) 3-year senior secured FRN priced at 65bps. Good secondary buying in major bank Tier 2 notes with the mid part of the curve (4-6-years) closing 2-3pts tighter whilst the shorter end was one point tighter across all names. Longer dated notes margins were unchanged.
High Yield Markets
US high yield markets tracked sideways at all-time tight margins. Monies continue to flow strongly into HY funds. Additionally, many issuers have sought funding from private credit markets. These two factors have greatly contributed to secondary market demand and the resultant low spreads.
Hybrid volumes were elevated with a slight widening of spreads over the week. AN3PH topped the volume at just over 92k units trading hands. ANZ announced that AN3PH will be repaid on March 20 and is unaccompanied by any reinvestment offer. We would expect some of this $930m issue to look to be reinvested back into the sector and hence some tightening of spreads in late March.
Currently the hybrid margin curve is very flat with nearly all issues trading between a 1.95-2.15% margin regardless of maturity. This reflects holders terming out via selling shorter dated to by long dated issues. This is also shown by volumes with the two longest maturity major bank issues, WBCPM and NABPK, each topping trading volumes along with AN3PH.
Listed Hybrid Market
Hybrids – RBA cash rate to reset dividends.
Hybrid dividends are reset each dividend payment date. The formula is simply the Issue margin + the bank bill rate on the day to give the per annum rate. The actual payment is then done on a day count to the next payment date. The RBA decision to cut rates this week by 0.25% will pull bank bills down. Late last week 3-month bank bills were 4.15%, down from around 4.40% for the past 12 months. Hence any hybrids paying a dividend from now on will be reset from the new bank bill rate. In this situation the longer the hybrid/bond is paying on the old rate the better. This would be for hybrids that have paid dividends in the weeks prior to the RBA cut this week. Given nearly all hybrids are to go ex-dividend this week. the list of those that have just paid is thin; only AYUHD, AYUHE, BOQPF and LFSPA. From now on, dividend rates will be 0.25% lower than previous, and total yields will drop. The chart shows the total yield (the combination of bank bills plus trading margin) moves up and down with the cash rate. The good news the drop is only 0.25% per annum so far. It is very unlikely we will return to the 0.10% cash rate days. Nevertheless, for floating rate securities like hybrids, a lower cash rate will reduce yields.
Forward Interest Indicators
Australian rates
Swap-rates fall in line with bond rates. Bill rate falls after cash rate cut.
Swap rates:
- 10-year swap 4.43%
- 7-year swap 4.26%
- 5-year swap 4.12%
- 1-month BBSW 4.09%
