Markets are pricing in almost a 90% chance of a US Fed rate hike, taking its target range to 3.75-4.00%, expected overnight. US Core PCE inflation was at 3.3% year-on-year and has been above the Fed’s 2% target since March 2021. Unemployment is low by historical standards at 4.1%.
I really liked this quick take by Laura Cooper from Nuveen:
“The Fed looks to get back into the hiking game. The Bank of England would probably rather not touch rates at all. And the Bank of Japan is taking its time finding the right policy path. That leaves investors to work out where market pricing is the best match and where they may be reading the signals all wrong. Our take: two hikes and a hold…
We see Fed hikes as likely to be limited rather than the start of a renewed cycle, think markets are pricing too much tightening from the Bank of England, and expect the Bank of Japan to have further to go at a quicker pace. In a week of central bank dating, the best opportunities may be where market pricing and policy rates are headed for a breakup.”
Yesterday the US 10-year Treasury yield closed at 5.02%, its highest level since 2007, amid an ongoing sell-off in government bonds. Investors are concerned about escalating oil prices, inflation and the impact of global tightening.
The European Central Bank (ECB) had its second rate hike since the start of the Iran war last week. Rates on the deposit facility, main refinancing operations, and the marginal lending facility were raised by 25bps to 2.50%, 2.65%, and 2.90%, respectively.
At home, the market continues to expect the RBA Monetary Policy Board to hike and take rates to 4.6% at the end of the month.
Our lead article this week is from Jon Lechte of Income Asset Management who compares rate hike impacts of Commonwealth Government bonds back when rates were near zero, to now when rates are much higher. This is a very insightful article and well worth a read.
I had the pleasure of interviewing Steve Boothe from T. Rowe Price last week. Boothe has spent 25 years in credit and is now responsible for US$70 billion in investment grade bonds. We discussed trading and hedging portfolios, tech advances, hyperscaler issuance and the markets he’s targeting to outperform rising passive investment.
Private credit continues to garner attention as the fallout from the Bathla administration is ongoing. We have two articles on private credit.
The first is from Stephen Martin of Challenger Investment Management on commercial real estate debt. Martin says the real value in underwriting is identifying a loan’s margin for error and that four variables are particularly important.
The second is from Michael Frearson of Real Asset Management, who identifies two key risks, credit and liquidity. He believes liquidity is more a structural problem, that is open ended vehicles are offering periodic liquidity against illiquid assets.
What does rising yields mean for investors? Stephen Dover of Franklin Templeton says there are three points to note. Top of his list is to extend duration.
In Australian corporate bond market news:
- Anglican Water Services has raised $350m in an inaugural five-year fixed-rate bond deal, with a 6.622% coupon
- Aurizon has raised $400m in a 10-year fixed-rate senior unsecured bond with a 6.84% coupon and 175 basis point margin over semi quarterly swap
- E.ON has raised $300m in a six-year green fixed-rate senior unsecured medium-term note that priced at 110 basis points over semi quarterly swap, or 6.072% issue yield
- ING has raised $1.5 billion in a dual tranche covered bond:
- $1.3m floating rate priced at 60 basis points over 3-month BBSW
- $200m fixed rate with a 5.71% coupon
- P&N Bank has raised $300m in a three-year floating bond priced at 115 basis points over 3-month BBSW.
Hope you’re having a great week!
