Where to now for fixed income investors?

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The RBA joined seven other central banks in easing policy this month. The RBA cut the cash rate by 0.25% to 2.75%, revising inflation forecasts lower, and increasing the scope to cut rates again in the future. With the RBA inflation target range being 2% to 3%, another rate cut means investors are effectively getting 0% real returns at the cash rate.

Given favourable market conditions of low base rates and lower credit spreads, issuance activity in the debt capital market continued at a steady pace this month. So far in May, total issuance volume has been $8.6 billion, the second highest year to date, behind the $12.62 billion of issuance undertaken in January, as companies take advantage of favourable borrowing conditions.

The great yield chase

The Australian iTraxx Credit Default Swap (CDS) index tracks the performance of Australian corporates and is an indicator of credit risk for investment grade entities. The lower the spread, the lower the perception of credit risk. The charts below show performance over one month and one year. Over the last month, the Australian iTraxx tightened some 15 basis points and over the last 12 months has tightened just under 100 basis points.

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