Although the headlines will be all about the US jobs data it was probably a combination of factors that triggered the big fall in US yields on Friday night. In no particular order here is the Friday night list:
- Non-farm payrolls plus 74,000 jobs added in July.
- June payrolls were revised down from 147,000 to 14,000.
- May payrolls were revised down from 144,000 to 19,000.
- Trump then sacked the Bureau of labour statistics chief after claiming the jobs number had been manipulated for political purposes.
- Trump called for Governor Powell to resign, again.
- ISM manufacturing PMI fell to 48 in July from 49 in June and had expected to show an increase.
- Geopolitical tensions increased dramatically after Trump declared he had ordered the deployment of two nuclear submarines in response to threatening statements from Russia.
In hindsight the poor jobs growth since Trump announced tariffs on liberation day only to pause them for 90 days while negotiations could be undertaken with unforeseeable results, is not at all surprising. What rational business owner or manager would make a decision to invest, hire, order or change production levels until the tariff outcome was known?
The other factor at work in the June quarter is the Doge cuts to government employment levels. Although actual cuts to employment numbers may not yet have occurred, we can assume with a high degree of certainty that Doge was successful in getting a hiring freeze. The Fed Reserve may not react to this jobs report with an interest rate cut because:
• Unemployment at 4.2% is still well below full employment after a fall in labour supply.
• Wages growth is still strong the inflationary impact of the tariffs may prove to be transitory but only if the US dollar increases to offset them.
Up until Friday night the US dollar was actually rallying but the Federal Reserve will remain wary of a falling dollar that will accentuate the tariff impact on inflation. Empirically, there is little to no correlation between the value of the US dollar and equity prices but there is a strong correlation between the US dollar and US bond yields.
Prior to Black Monday 1987, when the Dow Jones average dropped 22.6% in a single session, the Reagan administration was actively pushing for a lower dollar, the Dow Jones Industrial Average had, at that point, dropped 7% since the beginning of 1987 after the collapse of the Plaza and Louvre Accords and it was pressuring the Federal Reserve to cut rates.
Interest Rates
The weaker than expected jobs report triggered a big rally in bonds and a reversal of the markets hawkish tone after the Fed kept rates on hold. The revisions to June and May data were huge and show that business has executed a hiring freeze amidst the Trump policy uncertainty. Over the week 2-year yields fell 25bps to 3.70% and the 10-year dropped 14bps to close at 4.22%. The Fed kept rates on hold despite two of the 12 voters voting for a The US market’s hawkish read on Wednesday’s FOMC press.
Long Australian rates essentially mirrored the moves of US rates however at the short end of the curve the 2-year yield finished trading on Friday at 3.39%. Given its connection to the RBA official rate, we do not see much reaction on Monday to the fall in US 2-year yields. The 10-year yield should, however, drop about 12bps to 4.20% given the move in the US 10 year.
Major Credit Markets
US Investment grade (IG) credit weakened on Friday as investors reacted to a weaker-than-expected U.S. jobs report and the implementation of new U.S. tariffs on dozens of trading partners. Corporate credit spreads in both the EUR and USD markets have moved almost in tandem since April, reverting to their tightest levels so far this year. While not unusual, this high degree of correlation at the index level has surprised some market participants, given the headwind from tariffs.
Major bank senior bonds margins tightened again last week to levels where we have previously seen new issuance emerge. 5-year margins and look expensive given 3-year margins are still 63bps. Tier 2 bonds traded tighter by 3-5 bps at the short end of the curve while the longer dated bonds were steady at 160bps. Trading throughout July has been very active in T2 with the equity market stability providing support. With no major bank T2 issues expected in August, margins may grind tighter still.
High Yield Markets
Global High Yield (HY) remains strong with issuance digested easily. Beneath the headline index, significant divergence has emerged at the sector level. In the EUR market, B-rated bonds have outperformed BB-rated bonds in terms of excess returns, while the opposite trend has occurred in the USD market. Similarly, defensive sectors such as Pharmaceuticals and Healthcare have outperformed their benchmarks within USD credit yet lagged in EUR credit. Conversely, more cyclically sensitive sectors—such as Automotives within investment grade and Retailers within high yield—have performed
The Hybrid market rallied last week with the major bank average margin falling by 0.05% to 1.97%. CBAPL, NABPH and WBCPH led the volume. Westpac announced the repayment of WBCPH to be on September 22 along with a final payment of $1.211. This is discussed below.
Listed Hybrid Market
Hybrids – beware short tenor exposure in September.
Westpac has announced it will redeem WBCPH on September 22, with no replacement issue planned for the $1.69 billion hybrid. This significant return of capital is likely to spark increased demand for alternative yield products. When such instruments do not fall within traditional categories—like hybrids or bonds—they are often referred to as “credit products.”
So far, one such product has been announced. As reported in the AFR on July 23, Revolution Asset Management has commenced a roadshow for a $300 million private credit listed investment company (LIC). We expect other issuers to follow suit.
This mirrors what we saw in February, when the Realm DA1 and MA Financial’s MA1 credit products were brought to market alongside the redemption of the $960 million AN3PH hybrid. Importantly, funding for these new issues is not restricted to redeemed hybrids; in February, there was notable selling of short-term hybrids to generate liquidity. This led to a flattening of the hybrid yield curve, which typically exhibits a positive slope.
We expect a similar pattern to emerge in September. The chart below shows the current margin curve. We anticipate securities like CBAPJ, WBCPJ, and CBAPI will be sold down to trade at margins closer to NABPF.
Forward Interest Indicators
Australian rates
Swap-rates falls with falling bond rates.
Swap rates:
- 10-year swap 4.11%
- 7-year swap 3.86%
- 5-year swap 3.65%
- 1-month BBSW 3.67%
