06 May 2024
Patrick Moses
All eyes have been on global bond markets recently as stickier than expected inflation across the US and Australia has caused the market to taper back their rate cut expectations for 2024. The question has now shifted from “when” to “if” rate cuts will happen locally this year. Markets were almost fully pricing an RBA cut by year’s end just ahead of Q1 CPI, but a dramatic U-turn last week following the hotter than forecast CPI print has markets pricing in a small chance of an RBA hike in coming months, leaving RBA an outlier in G10 central bank expectations. For the Fed there is now only one 25bp cut now priced in the US market, a far cry away from the 125bps worth of cuts priced in just a few months ago.
This has pushed yields higher to levels not seen since early December 2023 as 5y Swap rates have fallen 53bp from 3.80% to 4.33% with Major Bank 10NC5s yields now back near ~6% and 15NC10s are around ~6.3%. With Major Bank T2s around the 6% mark and some of the recent Aussie corporates (Aurizon, Syd Airport etc.) now trading below par, there is a spate of high value opportunities currently available. This creates opportunities for bond investors to lock in higher returns north of 6%+ on the Aust investment grade.
Navigating Supply Dynamics and Seizing High Yield Opportunities
This significant move in yields in April presents attractive entry levels for investors looking to top up. We highlight the recent S&P upgrade of Australian Major Bank T2 securities from BBB+ to A-, which creates larger capacity within mandates and greater relative value versus A-rated corporates. Q1 2024 was the largest ever quarter of A$ T2 supply with over $8b being issued. If we consider the Major’s net Tier 2 supply requirements after updating for post reporting issuance, of particular interest is that ANZ and WBC are now showing negative net new supply requirements (i.e. need to issue less than upcoming maturities) while ANZ and NAB are sitting well under A$1bn per year required. Given the average A$ Major bank deal has been A$1.5bn+ over the past year and the fact that USD Tier 2 continues to sit a touch inside A$ equivalents, it’s hard to see how we can get too much A$ Tier 2 supply from the Majors in the next six months. Given all the factors at play, there appears to be upside for those looking to add the fixed tranche Tier 2 bonds to portfolios.
Whether you believe interest rates have further to go (or not) we are nearing the inflexion point where the balance between inflation and growth dynamics coincide globally. This has generally been the best time to add duration, as when growth slows, these fixed rate bonds tend to outperform their FRN equivalents.
Reach out to your IAM Relationship Manager for the standout Investment Grade securities yielding north of 6% or email our Client Services team.
