Market sentiment has somewhat improved over the last quarter with decreasing volatility as most countries began to ease COVID-19 restrictions and the implementation of various government stimulus packages. However, despite market improvements, credit markets remain cautious given the further ongoing COVID-19 outbreaks in Australia and globally.
Globally, conditions in financial markets have generally improved and volatility has declined. The second quarter saw global debt issuance increase by 52 percent from the first quarter setting an all-time high for a 3 month period hitting US$5.5 trillion.
- The Markit iTraxx Australia Credit Default Swap (CDS) Index spread increased by over 200 bps during the month of March, peaking at 243 bps on 23 March. However spreads have since reduced and stabilised in the June quarter following a range of monetary and fiscal stimulus policy announcements, with the spread at around 87 bps on 30 June.
This is an overall net increase of ~40 bps compared to the pre-COVID-19 capital market environment.
Following the COVID-19 led disruption to the bond markets, the impact of various government stimulus policies has seen a significant recovery in liquidity (and to a lesser extent pricing) during Q2 2020. Despite this, the outlook remains uncertain and the recovery is not expected to be linear in nature given the ongoing concern around the prevalence and impacts of a second wave, an anticipated increase in loan defaults and insolvencies and ongoing trade tensions between US and China.
- Further details and analysis of Australia’s economic outlook as a result of COVID-19 and the recovery going forward is available from COVID-19: The Economic Outlook.
During the quarter, the RBA left the target cash rate unchanged at 0.25 percent from its previous reduction in March. The Board determined that it would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2–3 percent target band.
Following the continuation of the monetary and fiscal policy responses to COVID-19, the 10 year Australian Government Bond yields also stabilised, reducing from a peak of 1.50 percent in late March to 0.87 percent as at June quarter end, with low and high yields of 0.60 percent and 1.09 percent observed during the quarter.