Interest rate commentary for 14 August

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The minutes of the RBA Board’s August meeting were released this week. While they repeat the respective arguments for holding or raising the cash rate target, given the final decision was to retain the current cash target, it would seem an unchanged cash rate is the Board’s default position unless something of significance occurs.

Over in the US, the minutes of the FOMC July meeting provided a similar picture; the rate rises are pretty much done, at least for now, while the various inflation measures continue on their current, downward, trajectories.

Sovereign 10-year bond yields finished the week higher in Australia, the US and the UK while yields in major European markets remained fairly stable. Gradients of yield curves became steeper in Australia and less inverted in the US.

Cash futures prices no longer reflect traders’ expectations of movements by the RBA with respect to its target cash rate after changes in RBA policy took place in March 2020. However, they still reflect expectations in the domestic cash market of the actual cash rate. Prices of futures contracts at the end of the week implied the expected trajectory of the cash rate through the 2023/24 financial year had moved slightly lower.

There were a moderate number of changes to term deposit rates in this week’s YieldReport survey. Of the 35 changes, 22 took the form of rate reductions. The highest rate available in the survey remained at 5.35%.

The median margin of ASX-listed hybrids finished the week higher. Margins of ASX-listed notes displayed no particular trend.

BBSW fell again this week. Historically, 3-month BBSW has been at a modest premium (15bps) to the cash rate on average; the premium was 8bps at the end of this latest week.

Swap rates increased across most of the curve.

Semi-government spreads finished the week a tad wider on average.

Spreads of corporate bonds remained unchanged overall. Other measures of corporate risk, such as swap spreads, moved a touch in both directions while credit default swap premiums increased again.

The ICE Bank of America BBB US Corporate Index Option-Adjusted spread finished 4bps higher at 1.55%. The spread typically ranges between 1.00% and 3.00% in “normal” years.

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