Trump policy theories cause markets to jump

In the absence of any significant economic data the market last week was consumed by Trump economic policy conspiracies. This led the equity market to fresh highs and to a significant surge in bond yields. It is hard to fathom the markets economic logic with its Trump economic policy assumptions. He won’t get anything done without the approval of both Congress and the Senate. Even if the Republicans win all three houses of government in November it is highly unlikely that a Republican Congress would agree to much beyond extending the income tax cuts.

We had expected the bond market to abandon its narrative of multiple rate cuts this year after the stronger than expected employment data in September and significant upward revisions to July and August data. It would take a dramatic decline in the Federal Reserve preferred measure of inflation – the quarterly core PCE price index – to justify another cut in rates.

Interest Rates

The rise in US bond yields last week was not due to the media narrative that the market was pricing the economic policies of a Trump presidency, but a realisation that the economy is not as weak as the Federal Reserve assumed when it raised rates by 50bps in September. The surge in the Move Index to 12-month highs at 128 reflects the market repricing bonds for higher inflation. US yields finished at week highs, 2 year 4.10% and 10 year 4.24%.

The Aussie yield curve move broadly in line with changes to the US yield curve. The benchmark curve has flattened since July such that 2 years yield is now 3.95%, the 5 year is 4.05% and the 10 year is 4.45%. The steepening of the curve at the long end 5 to 10-year area has now pushed the Aussie 10 year from a 10bp premium to the US 10 year in July to 21bps. Treasury Corporation of Victoria issued 1.25bn of 2040 maturity bonds at a 5% coupon, this being a margin over futures of +128bp, equivalent to 0.99% above the comm. Gov Mat 2041 bond yield.

Major Credit Markets

US investment grade (IG) Corporate bond spreads move sideways to slightly wider as Federal Reserve’s latest survey strengthened expectations for a more modest rate cut. Tesla’s strong result however buoyed the IG market. Investors are looking further down the risk curve given tight high-grade margins.

The Australian IG market was slightly weaker with rising bond rates taking investors eyes off secondary markets to focus on the rates direction. Issuance was lighter, however, reflecting the strength of the credit market. Great Southern Bank raised $300m 3-year FRN at +103bps. This represents a huge tightening from the previous +160bps six months ago. Similarly, Hollard Insurance priced $115m of a 15NC5 tier 2 FRN at BBSW+2.20%, well under their inaugural AUD Tier 2 deal in Dec 2023 at BBSW + 3.50%. Melbourne Airport issued $500m in an 8-year senior secured fixed rate bond at swap p+ 1.38%, total YTM of 5.598%.

High Yield Markets

US high yield (HY) markets remain strong despite IG market spreads widening slightly. Underpinning HY demand is continual good economic data. Buyers see no reason to sell when revenue lines are growing and profits strong. Further HY supply recently has been limited. YTD average HY corporate spreads are tighter by 0.41%.

Hybrids spreads moved tighter over the week. The average major bank hybrid margin tightened by 0.08% to finish at 1.78%, a recent low. Volumes were around average, concentrated still at the long end but also the short dated WBCPH and Dec 2027 maturity NABPH.

Australian Unity MCI’s AYUPA are still finding buying demand despite recently going ex-dividend its large semi-annual distribution. The price of this fixed rate security does vary with long bond rates. The recent entitlement offer at $72.50 is now fully digested with near 20k units changing hands last week at a VWAP of $82.85.

Listed Hybrid Market

Hybrids – October moves

As mentioned above, hybrid margins are at lows, with secondary market demand moving spreads in the absence of no primary issues. This will continue for the rest of 2024 given the APRA review is still ongoing. The chart below shows the major banks’ trading margins from September end to October 25. Clearly the second half of the curve has moved down, more pronounced at the long end. WBCPM for example has contracted by 0.50%. At the shorter end, most hybrid margins have moved wider, WBCPH by nearly 0.40%. Spreads are even slightly wider mid-curve.

Outside the major banks the picture is somewhat different. Longer dated Macquarie and Suncorp issues have contracted whereas at the shorter end there is some widening as with the majors, however a few issues trading tighter, such as AMPPB and MBLPC.