In the past two weeks, the Australian 10-Year Treasury Yield has surged from 2.35% to 2.73%, its most notable move since the US presidential election in November 2016. While financial markets have been expecting higher long term interest rates for most of the year, a recent announcement from the European Central Bank (ECB) surprised investors and ticked another box on the checklist. Minutes released last week divulged the ECB is “revisiting the easing bias with respect to the APP purchases, whereby the Governing Council signalled its readiness to increase the pace and/or duration of the asset purchases if necessary”. This follows the Federal Reserve’s previously announced plan to gradually unwind its balance sheet in line with its broader strategy of normalising interest rates. Helping the Fed’s case was the US jobs report on Friday which revealed the US economy added 222k jobs in June (versus the consensus estimate of 178k). Ultimately, two major central banks have now advocated the prospect of higher interest rates amidst the tapering of asset purchasing programs. For this reason, we believe a steeper yield curve is inevitable. Although the timing remains uncertain and the RBA is somewhat lagging its global counterparts, the era of easy-money policies is coming to a close.

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

SA Bank Levy In a win for the Major banks (and Macquarie), the South Australian Liberal party signalled its plan to block the State government bank levy flagged in the South Australian State Budget. For those who missed the announcement, the State Labor government decided to address its financial woes by proposing a 4-year $370 million Major Bank Levy in light of South Australia’s growing economic imbalances. This was soon dismissed as an outright cash grab and if passed by State parliament, would set a legal precedent for other states to follow. As a result, we believe the move by the opposition party to vote against the legalisation is positive for South Australia’s long-term economic stability.

High-Yield Update Following action from NEXTDC (ASX: NXT) and Capitol Health (ASX: CAJ), G8 Education (ASX: GEM) was the latest high-yield corporate issuer to announce an early redemption of its outstanding notes. In May 2017, the group signalled a ~$196 million institutional share placement to repay existing debt facilities and fund the committed acquisitions of child-care centres. G8’s 7.65% fixed rate 2019 wholesale notes were included in the group’s target debt reduction and last Wednesday, management announced its intention to redeem the bonds on the next optional call date (7 August 2017). Consequently, investors who subscribed to the notes with a buy and hold strategy will achieve a yield to call of 8.08% p.a. which highlights the reward (and importance) of in-depth credit research for high-yield corporate debt. In other high-yield news, Peet Limited (ASX: PPC) closed its offer on its Series II bonds (ASX: PPCHB) with a final offer size of $50 million. The bonds were issued last Wednesday and are expected to begin trading on a normal settlement basis today. The bookbuild was completed on the 21st of June 2017 and the interest margin was set at 4.65% p.a. above 90-Day BBSW.

CBA 30-Year Bond In October 2016, the Australian Government issued its inaugural 30-year bond raising $7.6 billion with subscriptions exceeding $13 billion. Taking a leaf out of the Treasury’s book, the Commonwealth Bank of Australia (ASX: CBA) last week announced its own 30-Year USD fixed rate bond. The $1.5 billion deal was priced at a margin of 1.03% above the government bond curve (3.9% yield) with final legal maturity date on the 12th of July 2047. These securities are sold to wholesale investors only (no prospectus being issued) and are not listed on the Australian Securities Exchange. While we do not normally cover this part of the curve, it highlights growing consensus among major participants in the Australian bond market that we have reached the bottom of the interest rate cycle.