Global markets remained resilient last week as the UK election result and former FBI director James Comey’s testimony failed to deter investor sentiment. While the British pound was weaker against most major currency pairs, broad market indices (both equity and credit) were left relatively unscathed. This week, the Federal Reserve is expected to raise US interest rates (by the end of its two-day meeting tomorrow). However, US interest rate futures suggest the timing of further rate hikes is uncertain and will largely depend on inflation data in the second half. Importantly, we expect the Fed to reveal detail into its unwind of the central bank’s US$4.5 trillion balance sheet in a prudent manner without disruption to financial market conditions. Last week, we launched our inaugural Market Review for May 2017. The end of month report is designed to give users information on events, corporate actions, news and announcements affecting our strategic thinking (i.e. duration positioning, fundamental credit view) plus tactical opportunities as they arise. It also includes our new “Data Tracker” which is designed to provide consistent and objective measures of performance and risk across the universe of domestic debt and hybrid securities.

Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – May

Australia Q1 GDP Domestic GDP figures released last Wednesday met market expectations with annual economic growth coming it at 1.7% for the March quarter (0.3% m/m). Australia stumbled over the finish line into second place (behind Japan) for the most consecutive quarters without a technical recession (two successive quarters of economic contraction) with the economy growing at its slowest pace since 2009. The RBA and Treasury remain optimistic of Australia’s economic transition but treasurer Scott Morrison acknowledges that subdued wage growth “remains our most important economic challenge” which fell below inflation last quarter. This remains a key economic concern in the short term.

ASX-Listed Debt & Hybrid Market ANZ Subordinated Notes (ASX: ANZHA) and Heritage Retail Bonds (ASX: HBSHB) ceased trading on the ASX last week with both expected to be redeemed on the 20th of June 2017. No replacement/rollover security has been offered to investors with both issuers choosing to refinance in the wholesale market leaving ~$1.7 billion of retail funds uninvested. With ~$1.7 billion of Westpac Subordinated Notes (ASX: WBCHA) likely to follow the same fate in August 2017, the technical environment (demand/supply) is expected to remain supportive for trading margins. There are very few like-for-like investment options on the ASX (the closest being WBCHB or NABPE) making security selection difficult.

Fixed Income ETFs In response to investor demand for cash alternatives, 3 new fixed income Exchange Traded Funds (ETFs) were launched last week. – iShares Core Cash ETF (ASX: BILL) which aims to track the S&P/ASX200 Bank Bill Index. – iShares Enhanced Cash ETF (ASX: ISEC) which aims to provide excess returns over the S&P/ASX200 Bank Bill Index. BetaShares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON) which aims to track the Solactive Australian Bank Senior Floating Rate Bond Index. With these new products, there are now 17 fixed income ETFs available to investors listed on the ASX. For more information about domestic fixed income ETFs please contact us at

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