Australian Bond Exchange Weekly Update
23rd August 2024
Key points
- Diminishing returns for term deposits
- RBA rules out rate cuts in 2024
- Fed flags September rate cuts
- Private credit warning
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to June is 3.8%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to July is 2.9%.
- The Bank of England Bank Rate currently sits at 5.0%pa to fight an inflation rate of 2.2% in the year to July
- The European Central Bank Cash Rate (deposit facility) is 3.75%pa, to fight an annual inflation rate of 2.5% in the year to June.
Diminishing Returns for Term Deposits
Australia’s major banks including CBA and ANZ have slashed interest rates on various term deposit products – the former by up to 50 basis points and the latter by 80 basis points – underscoring the growing reinvestment risk for those hiding in cash and shorter-dated term deposits.
The next move from the RBA is expected to be lower and commercial banks are clearly looking to get ahead of the curve now.
With corporate bonds and other fixed income securities still offering returns between 6 – 8% per annum with terms of 2-5 years, investors still have a golden opportunity to lock in attractive yields that can provide a steady income stream.
RBA Rules Out Rate Cuts in 2024
Despite the banks moving to reduce interest on term deposits (given their expectations of declining interest rates in the short – medium term), meeting minutes released by the RBA this week show the RBA contemplated hiking the cash rate in August due to ongoing inflationary concerns.
The minutes highlight the slowing disinflation process as a concern while also citing that household consumption was expected to pick up in the second half of 2024, heightening fears that inflation will become entrenched above the RBA’s target band.
Fed Flags September Rate cuts
Meeting minutes released by the Federal Reserve reveal that the U.S. is preparing for a September rate cut, with Board members citing ongoing progress on inflation, and a better equilibrium in labour market dynamics.
In the U.S. and elsewhere, the focus has been rapidly shifting to supporting economic growth over combatting inflation, and the latest American jobs data released this week will only give impetus to this trend.
Over the 12 months to March 2024, the U.S. added 818,000 less jobs than expected, while on a rolling monthly basis (from April 2023 to March 2024) 173,500 jobs were added vs the expected 242,000.
Overall, it’s becoming increasingly clear that the U.S. is on the cusp of pivoting to monetary easing, and investors should be cognisant of this and position their portfolios accordingly.
Private Credit Warning
PIMCO, one of the world’s largest fixed-income asset managers, has sounded the alarm on private credit in Australia, warning that many investors could be exposed to “an alarming rise in loan amendments and corporate restructuring”.
Demand for private credit has exploded in recent years as the promise of double-digit returns lures investors.
However, from poor transparency, lax operational management, and limited liquidity, there are various risks which investors should remain cognisant of.
Week Ahead
- Australian monthly CPI indicator
- Euro Area inflation
- U.S. PCE data
*Data accurate as at 23.08.2024
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