It is arguable that people in markets hope for a more relaxed December as the year comes to an end. But as we’ve become accustomed to with the re-emergence of inflation and change in interest rates, markets have been anything but relaxed, and December 2024 was another case in point. A few key events led to some pronounced movements in bond yields which will shape the outlook for 2025.
Weak economic growth and a more dovish RBA saw Australian bond yields decline considerably over much of the month. This saw market pricing for the first rate cut brought forward to the point where 50bps of monetary policy easing was expected by May.
However, the dovish vibes that were floating around the Australian market quickly disappeared following the release of the Australian Labour Force report, where the unemployment rate dropped considerably. Nevertheless, a rate cut will occur this year.
The US FOMC is looking at a shallower path of cuts in 2025. The outlook now looks drastically different to what was previously expected, which resulted in a repricing and move higher in yields. Officials updated projections (dot plots) showed just two cuts over the next 12 months, from a previous four, on the back of higher inflation and a stronger than expected economy.
The first month of 2025 has been dominated by the return of Donald Trump to the White House. His unpredictable style has already been on full display, particularly in relation to tariffs, with markets being taken on a bit of a rollercoaster ride. The new president has also weighed in on AI, oil markets, immigration, and global interest rates (i.e. he wants them cut immediately). Other announcements are likely to keep coming thick and fast which could result in any number of things.
In this edition, no new bonds were added to the retail menu or the Sample Portfolio.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio whereby we aim to weigh an appropriate level of risk and return. Overall, it remains more skewed towards preserving capital rather than chasing yield. It aims to have 20 positions.
This month, no changes were made to the Sample Portfolio. The running yield of the current Portfolio was around 5.49%*, and the Portfolio is an approximate $203k spend.
As has been the case for the past few months, the average yield remained lower compared to previous years on account of rate cut expectations and tight credit spreads. Rate cuts have since begun across the globe and with more priced in (to varying degrees), yields could remain at similar levels or fall.
As noted above though, global events can change this dynamic, which could be a key theme for the year. Some central banks such as the Fed are now more cautious regarding cutting rates too quickly, which saw yields jump higher. The return of Trump to the White House could add some further spice to this dynamic. Undoubtedly there is plenty of uncertainty at present, though opportunities do exist for those that look for options in new areas and are able to see past the short-term gyrations in the market.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
*Please note the indicative yield shown is the expected yield to the assumed maturity/call dates of
the bonds included in the portfolio, based on swaps rates at the time of writing.