The sharks have been circling the bond market for years claiming the 25 year bull market has come to an end. This time it seems they might be right
If Trump gets to implement his policies to increase infrastructure spending and if he gets to increase tariffs and if the US dollar continues to rise and inflation with it – the market could be right. That sure is a lot of ‘ifs’.
In just over two weeks, the Australian 10 year treasury yield has risen by 43 basis points (bps) equivalent to a real loss in value of approximately $4.50. It’s a very big move by bond market standards and while concerning should also be encouraging that a big move is relatively small compared to other asset classes.
However, this move isn’t universal. Various bonds have been affected differently and so I thought I’d compare prices of some popular bonds to show you how your portfolio may have been impacted.
The investment grade fixed rate Qantas bond maturing in May 2022 has seen its offer price decline by $1.35 to $117.50. This was less than the 10 year government bond, in part because it’s shorter dated with less than six years to maturity but also because the credit spread – the extra margin over BBSW – tightened by another 15bps.
High yield, unrated fixed rate bonds have been less affected. In the example I use the Sunland bond maturing in four years in November 2020. This bond trades more on price than yield and has not moved since 9 November. I could have chosen just about any one of the FIIG bonds and the results would have been similar. Overall higher returns cushion price movements when yields are rising.
Finally, it’s worth assessing how floating rate bonds have performed. After all, yields are meant to move higher in a rising interest rate environment. In this instance I’ve chosen the Suncorp insurance subsidiary, AAI subordinated Tier 2 bond with a first call in October 2022 and no surprise, it has performed to expectations and the yields has risen from 4.518% to 4.881%.
Can you guess what happened to the offer price? It was virtually unchanged from $104.227 on 9 November to $104.371 on Friday 18 November.
Source: FIIG Securities
Clean price excludes accrued interest
A new issue demonstrates ongoing significant demand
Last week, Westpac issued a new USD subordinated Tier 2 15 year, non call 10 (15YNC10) bond. Rather than being concerned about the trends in the US sovereign market, investors were falling over themselves to invest. Westpac had hoped to raise US$1.5bn but must have been delighted when investors bid around US$5bn.
Initial price guidance was 237.5bps over US Treasuries, but priced at 210bps. Once the bond was issued, the yields rapidly traded sub 200bps, delivering a quick profit to investors that were lucky enough to receive an allocation.
Financial commentators have whipped up a feeding frenzy, citing the largest bond market losses in over 25 years. If you are worried about your corporate bonds we have investors wait-listed for some of them and would expect virtually all would be easy to sell.