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Mutual Daily Mutterings


Quote of the day…


“Sometimes I think the surest sign that intelligent life exists elsewhere is that none of it has tried to contact us.” – unknown











“Hold The Line Please…”





Overview…”caution persists”



  • Moves: risk off… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • At first glance a quiet night given this is the narrative out of US markets…”US stocks fell in a volatile day of trading as investors weighed prospects for growth against a backdrop of rising prices and tightening monetary policy. Treasuries held gains amid a steady stream of haven bids.”  Pretty sure I’ve read that sentence at least a dozen times over the past few weeks.  The rout in stocks over the week week has left the S&P 500 on the cusp of notching up its seventh weekly decline, the longest losing streak since the dotcom bubble burst some 22 years ago.  Credit spreads are drifting.


  • Hate to say I told you so, but we’ve been expecting the safe haven bid to emerge in treasuries, and we’re now seeing it.  Risk from here though is impact of quantitative tightening and policy overshoot, which could send yields back up again.  It’s a precarious path to tread and I’ll be honest and say I really don’t know which way the market will go from one day to the next.  Last night, weaker than expected US jobless claims and a sharp decline in a regional Philadelphia Fed survey also spurred a burst of bond buying.  US 2-year treasury yields are -18 bps from recent peaks, while the 10-year yields are -29 bps below recent peaks.


  • Talking heads…”in this bear market, the sour mood has been persistent and hasn’t helped at all in trying to time a market rebound. But that’s what happens in bear markets, oversold gets more oversold. That said, this level of bearishness can always lead to good bear market rallies.”  Thatta boy, keep ya chin up, keep punching!


  • Talking heads part 2…”everybody’s afraid that policy makers are “going to get it wrong.”  We actually are a little bit more dovish in terms of what we think the Fed’s gonna do, and if they move in the summer and then actually do take a bit of a pause, then there’s a chance that we get out of this without a recession.


  • We’re off to the polls tomorrow.  Please find my ramblings later in this note, relating mainly to interest rates.  For stocks…“Australia’s election may bolster local shares no matter who wins, if history is a guide. The S&P/ASX 200 Index has risen in the three months after eight of the last 10 trips to the polls, by an average of +2.4%. The potential for a hung parliament after Saturday’s vote is a risk, though: Such an outcome could impede lawmaking or make policy less market-friendly.” (Bloomberg).  Credit markets won’t care who wins, i..e. no spread impact likely.


  • Community Service Announcement: I may be absent from the airwaves on Monday.  I have a conference in Sydney and I may not get to the daily.



The Long Story….


  • Offshore Stocks – European markets were comfortably down on the day, between -1.0% and-1.5% on the usual concerns.  US markets were a little choppy, generally trending down from woe to go, but with a couple of brief moments of optimism where the S&P 500 poked its head above water (+0.4% – 0.5%).  A late run for cover saw the index close down -0.6%.  The DOW was the worst performer at -0.8% and the NASDAQ the better performer at -0.3%.  Within the S&P 500 just over half of stocks retreated and only three sectors decided to come in to work, Materials (+0.7%), Healthcare (+0.2%) and Discretionary (+0.1%).  At the shallow end of the daily gene pool we had Staples (-2.0%), Tech (-1.1%) and Industrials (-0.9%).


  • Short-sellers are lining up. Short interest in the $352 billion SPDR S&P 500 ETF Trust as a percentage of shares outstanding is above 7%, close to the highest since March 2020, IHS Markit data show. Bets against the $19.5 billion iShares 20+ Year Treasury Bond ETF have shrunk to 3.5%, the lowest since September 2020.” (Bloomberg)


  • Local Stocks – a tough day in the trenches for local stocks yesterday, following on from the prior offshore session’s weakness.  The ASX 200 dusted -1.6% with 83% of stocks retreating.  Only one sector gained ground, Healthcare (+0.1%) and only just.  At the other end of the performance table we had Staples (-3.7%), Discretionary (-3.1%) and Tech (-2.7%) lighting up the losers section.  By virtue of their weighting in the broader index, Financials (-1.8%) and Materials (-1.7%) did all the damage, accounting for just under half of the ASX 200’s losses.  Futures are pointing to modest losses today, -0.13%.


  • ASX 200 Relative Strength Indicators


Source: Bloomberg, Mutual Limited


  • Offshore credit – “about three issuers were on the calendar, but syndicate desks are likely to hold off new deals given the selloff. The issuance backdrop isn’t appealing for borrowers with equity futures firmly in the red and the high-grade CDX wider by about 1.5 basis points. Treasury yields are lower with the 10-year offering around 2.82% while the average high-grade corporate bond spread is at +147 basis points, the highest since early July 2020.” (Bloomberg)


  • Historical offshore spreads, with AU FRN for context


Source: Bloomberg, Mutual Limited (the ‘Line in the sand’ is the level where credit spreads are deemed to be restrictive from a macro perspective)


  • Local Credit – traders yesterday…”extremely quiet today with both flow and broader interest the lightest it has been this week (which is saying something!) With the risk backdrop shaky and equities taking a beating overnight most market participants were happy to stick to the sidelines. Spreads close intuitively wider though minimal flow behind the moves.”  In the major bank space, WBC’s US$ deal did no favours for A$ investors, pushing spreads wider. Traders again…”the curve closes wider and steeper on the back of the US$ Westpac deal overnight, which offered a significant concession to the local curve irrespective of the deterioration in risk at the time of pricing. In terms of flow, interest was as light as it has been for some time. We traded small parcels out to the 3yr point but note radio silence in the long end of the curve, street interest helps firm the below levels.


  • Major bank senior paper is quoted around +1 – 2 bps wider yesterday on the back of the pull from WBC’s offshore deal.  Five-year is at +103 bps, while 3-year is at +77 bps. In tier 2, the CBA Apr-27’s are +211 bps (+2 bps CoD), while the 2026 calls are at +198 – 206 bps (+2 bps CoD) and the 2025’s are at +188- 190 bps (+2 bps CoD).  Tomorrow’s election outcome will be a non-event for credit markets.


  • Bonds & Rates – a solid rally in local markets yesterday given the risk off leads from offshore markets.  As we’ve been banging on about, risk to growth from inflation risks and monetary policy responses signalled to us that yields had gone too far in the rise from the bottom.  ACGB 10-year bonds at 3.39% (-8 bps CoD) is closer to my “rule of thumb fair value”, right-here, right-now.  For the first time in a while, the market implied terminal cash rate has fallen (chart below), albeit marginally.  The market is still pricing terminal cash approaching 3.5% vs the RBA and street consensus at 2.4% – 2.6%.   Given US leads, we’ll likely see another modest rally today, in bonds.


  • Despite the recent rally in bonds, month to date returns in the fixed income space are still materially in the red.  The Bloomberg AusBond ACGB index is down -1.2% MTD and -8.8% YTD.  The Semi index is down -1.1% MTD and -8.6% YTD, while the fixed rate credit index is down -0.7% MTD and -6.5% YTD.  The FRN index continues to outperform in a rising interest rate environment, but nevertheless is still down -0.1% MTD and -0.4% YTD.


  • Market pricing – terminal cash rate shifting…



  • A$ Fixed Income Markets…


Source: Bloomberg


  • Local Macro – labour data out yesterday with unemployment printing bang on consensus, 3.85% (vs 3.93% prior – revised down from 4.0%), this is the lowest unemployment rate since the year I was toilet trained, 1974.  The fact that I was born in 1964 was of concern to my parents!  Joking, I was born in 1971, and am reliably informed I was house trained well before I was three.  Net jobs added was a paltry +4K vs +30K consensus estimate and +18K prior.  The participation dropped a smidge, down -0.1% to 66.3%.  COVID continues to impact, with 742K people working fewer hours due to their own illness through April, which is only 3K less than the pandemic max.  “Overall, today’s data remain consistent with a still-tightening labour market and continued difficulty for firms in finding labour. This should see stronger wages growth emerge as the year progresses.” (NAB)


  • Offshore Macro…”US data mixed: The Philadelphia Fed manufacturing index fell to 2.6 in May from 17.6 in April – its lowest level in two years. A fall in inventories to 3.2 from 11.9 and a sharp drop in the employment sub-component to 25.5 from 41.4 led the decline. Offsetting those falls were gains in new orders (22.1 from 17.8) and a large rise in shipments (35.3 from 19.1). Prices paid fell to 78.9 from 84.6 and prices received fell to 51.7 from 55.0. Most firms (57%) reported business conditions were unchanged in the month. Overall, it was a mixed report but one where the majority of firms are still operating at very high levels. Initial jobless claims for the week ended 14 May rose to 218k, their highest level since January. The print covers the survey week for non-farm payrolls (NFPs) and was up from 185k in the equivalent survey week in April. That could be signalling that NFPs will be lower than April’s +428k.” (ANZ)


  • Steak Knives: The Election…some random thoughts…


  • I dislike politics in general.  It bores me to tears.  Supposedly mature and educated individuals arguing like petulant and entitled children, all pandering to the popular vote regardless of whether any given policy is good for the country or not.  I’ve seen monkeys at the zoo fling poo at each other with more dignity and maturity than most politicians.


  • My disdain for politics and politicians aside, I’ve made an attempt to dissect what might happen to our fair fixed income markets if ‘never-easy-Albanese’ wins, or if the incumbent ‘bulldozer’ ScoMo dodges the bullet and is re-elected.  Sportsbet have Labor at $1.48 to form the next Federal government, which has lengthened a touch over the week.  The Liberals in to $2.80 after being out at $3.75.  Odds of a Hung Parliament is a rather tight $2.20 (vs $1.65 for no Hung Parliament).  Rough and dirty, I’d say bonds will sell-off (yields rise) on a Labor win – if there are no overt direction from offshore, although arguably the strategic trend in yields is higher already and any election influence will be lost in the ether before long.


  • Broadly speaking, whoever is in power at any given time has minimal impact on the broader economy.  Perhaps some influences around the edges, but cyclically nothing material – i.e. under normal circumstances, the government of the day will not be able to prevent an economy slipping into recession.  Fundamentals aside, one area likely to differentiate a Labor government vs a Liberal government is each respective party’s attitude toward government spending and debt funding of said spending.  I acknowledge, these are very superficial comments, so stand easy, just some broad generalisations.


  • Philosophically, Labor is less inclined to worry about fiscal discipline, being more comfortable backing the debt truck up.  Liberal party governments on the other hand favour fiscal discipline…philosophically at least.  Looking at past governments in isolation, over the past 50 years, these philosophies don’t completely hold water, although there have been some extenuating circumstances.


  • Looking back over the data, both Labor and Liberal governments at varying stages have presided over meaningful growth in government debt, and conversely periods of fiscal discipline.   Be that as it may, it was the Rudd / Gillard Labor government (2007 – 2013) that fell in love with debt.  The Labor government inherited a healthy balance sheet from the Liberals, with negative net debt of -$39.9bn (more cash than debt) and only $55.4bn of outstanding ACGB’s, equal to 4.7% of GDP.  By the time the Liberals came back into power in 2013, net-debt had grown to $209bn and outstanding ACGB’s was $319.5bn, or 20.0% of GDP (charted below).


  • The incoming Liberal government in 2013, initially led by Malcom Turnbull, and then ScoMo, took the debt baton and ran with it.  It’s easy to say the pandemic and subsequent fiscal stimulus have been key contributors to the rise in debt here, which they were, but much of the growth in debt post the previous Labor government occurred before the pandemic.  Under the current budget, net debt is expected to be around $730bn, or 34% of GDP by the end of 2022.  For some context, the US Debt to GDP ratio is north of 100%.  Outstanding ACGB’s are forecast to be around $963bn, or 45% of GDP.  Importantly debt servicing costs (ACGB’s) as a % of GDP remain low at 0.8% vs the long run average of 1.3% (0.3% – 2.9% range).


Source: Parliament Library, May 2021


  • Given the changing interest rate environment, marginal debt servicing costs will only increase from here.  However, with the vast majority of government debt being fixed rate, the immediate impact of rising rates is modest from the government’s perspective.  However, rising underlying yields increase cost of debt funding in the economy, i.e. bank funding.  The challenge with trying to figure out what will happen with government debt is we haven’t really seen any costings for the most significant policies. Labor only released their policy costing yesterday, which would see a greater (+8.4bn) fiscal deficit than that forecast by the incumbent government.  That needs to be funded somehow, but in the context of A$1 trillion in government debt, or a $2.1 trillion economy, not that material…assuming it’s accurate. Realistically, bond yields will be driven principally by monetary policy rather than which clown calls the Lodge home for the next four years.


Source: Parliament Library, May 2021


  • I had some initial concerns the sovereign AAA rating (S&P) might be at risk, given Labor’s historical lack of fiscal discipline, and the agency’s concerns around fiscal deficits in years past.  However, having discussed the matter with a former colleague who knows sovereign rating methodology better than me, perhaps my concerns are baseless.  Be that as it may, I still have some concerns for the economy under Labour stewardship vs Liberal…particularly if stagflation eventuates.


  • In recent past when there has been a change of government, market (interest rates) reaction has been mixed.  However, over the past two elections, where there has been a change of government, bond yields have been trending higher (chart below).  In both cases that trend persisted for at least a year.   Not sure if that means anything this time around, doubt it.  Realistically, as I suggested above, inflation and monetary policy will drive markets, not who is voted in on Saturday.  And also, neither Labor nor Liberal will be able to materially alter the course of inflation.


Source: Bloomberg, Mutual Limited


  • Charts:





Source: Bloomberg, Mutual Limited



Click here find the full PDF from our Chief Investment Officer’s daily market update.



Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%