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Mutual Daily Mutterings


Quote of the day…

“It’s been my policy to view the internet not as an ‘information highway,’ but as an electronic asylum filled with babbling loonies ” – Mike Royko







“Yep, didn’t think of that did you? ….”





  • Moves: risk sentiment has strengthened somewhat… stocks , bond yields , curve , credit spreads , volatility and oil ….
  • US markets closed for Juneteenth Day, so minimal leads from the physicals or cash markets there.  Futures on the other hand were active, with reasonable gains on display.  S&P 500 E-mini’s are +1.1% higher, as are European markets, +0.9% – 1.7%, with the narrative one around whether last week’s sell-off had taken things too far on pricing in tightening monetary policy and growth concerns.  Hard to say, until we have a sense of whether inflation has peaked, or is close to peaking.  A sustain moderation in CPI measures is key to calming market nerves.  European bond yields rose, up +9 – 12 bps given some confusing and somewhat mixed rhetoric from ECB policy makers.  US bond futures (yields) rose slightly.
  • Per yesterday’s comments there is sizeable cash holdings sitting on the sidelines waiting to be deployed, however investors are waiting for the right entry point.  Market pundits from JPM have stated that pressure on stocks should ease in the second quarter as inflation moderates and “if the Fed were to start delivering on expectations, rather than surprising on the upside, that could go a long way in stabilizing market sentiment.”  Over at Morgan Stanley, they continue to caution investors about diving in just yet, they seen more risk to the downside.  I’m in team Morgan Stanley personally, especially with US Q2 reporting season around the corner – some earnings outlook adjustments expected to come down the chute.  Talking heads…”both prolonged inflation and/or a sharp increase in rates from central banks will have a deep impact on growth perspectives.  If anything, current valuations are more the ‘exit point’ than the ‘entry point’.”
  • Commodity prices have come under pressure on growth concerns.  Bloomberg’s Commodities Index is down -7.2% from intra-month highs with iron ore down -11.3% and oil (Brent) down -7.7%.  Hardly a rout in the context of recent trading ranges, but perhaps the start of something more meaningful.  Nevertheless, Bloomberg’s Commodities Index is up +39.1% from 2021 lows, with iron ore up +50.0% and oil is +75.0% higher over the same time frame.
  • Still on commodities…this nugget caught my eye…”the usual commodity cycle is one where higher prices lead to greater supply which in turn leads to lower prices. The post-pandemic price surge, however, is far from a “usual commodity cycle.” Supply-demand mismatches, long lead times in developing new projects, unwillingness to make critical investments to increase capacity and higher input costs for producers all mean that there is little, barring a recession, to stop commodity price inflation in the medium term.


The Long Story….

  • Offshore Stocks – US markets shut, so no leads there, other than futures, which are flashing green (+0.9% – 1.1%).  European markets rallied also, despite some mixed and confusing messages from the ECB – although one message that came through is that rate hikes will come through over the next 2 – 3 months.  Banks, travel & leisure and energy companies led the advance in the Stoxx Europe 600 index.  Basic resources underperformed amid a slump in raw-material prices, while construction companies declined.
  • Local Stocks – a down day yesterday for the ASX 200 (-0.6%), although we might see that reversed today given leads.  Having said that, the index is flashing ‘oversold’ according to some measures, although to date has dodged the ‘bear market’ tag (i.e. ↓20%).  I think I pegged my view on the ASX 200 at the 6300 – 6500 level for the near term, and we’re comfortably within that range.  I see no rhyme or reason to alter that range at this point in time.  As for yesterday, despite the sell-off, more stocks advanced (55.0%) than retreated, and the same for sectors, 7 vs 4 respectively.  Materials (-4.7%) represented the main headwind, reflecting growth concerns and the recent slide in commodity prices.  Energy (-5.2%) was their partner in crime, although with less of an impact on the broader index given a smaller weighting (24% vs 6%).  REITS (+3.5%), Discretionary (+2.8%) and Healthcare (+2.4%) did much of the heavy lifting in the top-side.  Futures are pointing to a solid open, +0.7%.


  • ASX 200 RSI’s…’oversold’…

Source: Bloomberg


  • Offshore credit – with US markets shut for the session, as good an opportunity as any to touch on default rates.  Per S&P data, the rolling 12-month default rate for US sub-investment grade rated companies is 1.4%, very modest all things considered, and on or around historical lows.  For some context, the long run average is around 4.5% (1987 – 2022) and the historical peak was 12.0% on or around the financial crisis in 2008 – 2009.  For completeness, European sub-investment grade default rates are running at 0.9%, although I can’t recall the long run average or peak here, I think its mid-3.0%, but with a shorter history of data.  The global default rate is running at 1.5%.  From memory, 60% – 70% of defaults within S&P’s rated universe are typically US based (on average) and rough and dirty, US companies make up around 60% of the rated universe.
  • S&P recently updated their forecast default rate for US sub-investment grade, at 3.0% by March 2023 (base case).  Underpinning this scenario is squeezed profit margins, slowing growth, and increased odds for market and economic disruption from aggressive monetary tightening.   So more than double from current levels, but well below long run averages.  Their worse-case scenario is for defaults to climb to 6.0%, and best case is at 1.5%.  Historically markets (spreads) have led default rates by around 6 – 12 months.  While spreads have widened of late, optically they are yet to signal an uptick in defaults…it’s inevitable though.  The vast majority of corporate borrowing in the US, particularly bond markets, which in turn is the dominant form of funding is fixed rate.  So, rising interest rates won’t materially change existing funding costs, rather the marginal cost of debt is increasing rapidly.
  • The Bloomberg US Agg Corporate Index weighted average credit spread has risen from +92 bps at the beginning of the year to +144 bps at the moment.  Over the same period, underlying bond yields (treasuries) have risen from say 1.50% to 3.25%, an increase of +175 bps.  Add the two and we have a +200 – 225 bps increase in the implied cost of corporate debt, almost doubling in six months.  A sizeable move and a meaningful headwind for underlying corporate fundamentals – particularly marginal companies.  Importantly to remember, the market leads default rates, not the other way around.


  • S&P default rate forecasts vs spreads (US)…


  • Local Credit – not a lot out of trader’s commentary yesterday, i.e. no material change to existing themes.  Having said that, we did see some pretty wild offers on the chats on tier 2 lines.  I say wild in the context of where we’ve seen them quoted generically on Bloomberg.  I can’t recall the specific line quoted, but the offer, if hit, would imply CBA’s Apr-27 callable line should be pricing in the +250 – 260 bps range, not the mid-230’s we’ve been seeing, or even the +217 bps per Bloomberg.  The most recent 5-year major bank senior is still pricing around +104 bps per Bloomberg, while the most recent 3-year is at +88 bps, so what’s that, a +16 bps 3s5s curve…pretty flat!  Something has to give, doesn’t it?  My calculations have the 5-year part of the curve at +109 bps and 3-year at +83 bps, so if markets were to behave as the text-books would suggest, the 3-years will rally -5 bps and the 5-year sell off +5 bps, but that’s not how it works.
  • With regard to the above chart, I used to have the same chart, but with A$ credit spreads.  However, when I left CBA to join Mutual, they surprisingly (not) didn’t let me take any of my data or models.  Soooo unreasonable!  And, given S&P charge a small fortune for access to their data, I can’t provide any updated charts on A$ credit spreads vs US default rates.  I can say, however, that the above charted relationship persists here, between A$ spreads and US default rates, albeit in a more muted fashion, which should be intuitive given how A$ spreads behave vs US spreads…see chart below.  While the chart below only goes back to the end of 2019, longer term, similar relationships on display here are evident.


  • US$ spreads vs A$ spreads….

Source: Bloomberg, Mutual Limited


  • Bonds & Rates – a modest rally in local bonds yesterday with a slight bull flattening of the curve.  Three-year yields closed at 3.612% (-4 bps), while ten-year yields closed at 4.075% (-6 bps).  Bank bills (90D) hit 1.84%, while BBSW 3M closed at 1.80%, a far cry from the beginning of the year (0.07%) and providing a lovely income tail wind for floating rate notes. While US treasuries (cash) were shut, futures (yields) are up, and OATS, BUNDS, and GILTS are all higher in European markets, suggesting we might see yesterday’s gains wiped.  With the RBA, Fed and other central bank meetings behind us for now, I see yields range trading for the very near term.  But, gun to my head, I’d say the outlook for bonds is likely to trend moderately higher, maybe +5 – 20 bps between now and the end of August.  CBA, my old shop, released updated bond forecasts yesterday.  They’re calling 10-year yields at 4.20% over the next two months, and 3.70% for 3-year yields over the same timeframe (tactical).  More strategically (>6 months), Marty McFly and the Brown Dog are predicting 3-year yields back at 2.60% (-100 bps from current levels) and 10-year yields at 3.10% (also around -100 bps from current levels).  Their cash rate forecast is 1.60% tactically and 2.10% strategically (vs 0.85% current).
  • While US bond markets were closed for the public holiday, Fed speakers were let off the leash.  And despite some soothing words from the likes of JPM’s market pundits, St Louis Fed President, James Bullard, was out and about warning that US inflation expectations risk becoming “unmoored without credible Fed action,” leading to even higher prices and economic volatility.  He further warned “the current US macroeconomic situation is straining the Fed’s credibility” over its price target and the divergence between actual readings and TIPS-based expected inflation “will have to be resolved.”  Over at the ECB, Christine Lagarde reiterated the bank’s intention to raise rates in July and September despite risks to financial stability – which she acknowledged had increase as the year rolled on.  Further comments around other ECB policies designed to ensure financial stability were not forthcoming.  And lastly, “Chief economist Philip Lane has popped up on the wires in the last hour saying that that the rate hike increment in September is still to be determined (in which respect the market has already decided it will be at least 50 bps and indeed is currently priced for more than +75 bps)” (NAB)


  • A$ Fixed Income Markets…

Source: Bloomberg


  • Macro the day ahead curtesy of NAB’s morning note…” The RBA dominates the local diary today – an 8am press release on the yield target, a 10am speech from Governor Lowe on Inflation and Monetary Policy and then the June meeting minutes at 11:30am.  The Queensland and NSW state budgets are also due today.  Outside of that it’s a quiet day in this timezone and arguably beyond that too – overnight we hear from several BoE and Fed speakers as well as getting US existing home sales and Canada retail sales data.”


  • Charts:




Source: Bloomberg, Mutual Limited


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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.78%
MIF – Mutual Income Fund
Gross running yield: 2.07%
Yield to maturity: 1.78%
MCF – Mutual Credit Fund
Gross running yield: 3.34%
Yield to maturity: 2.99%
MHYF – Mutual High Yield Fund
Gross running yield: 6.00%
Yield to maturity: 6.02%