In the old disinflationary world where central banks were buying most, if not all, of the debt issued by governments, there were no costs for profligate fiscal policy. But with the advent of high inflation, it is much more difficult, if not impossible, for central banks to bail out bad borrowers, compelling them to contend with the ruthless decision-making of bond market bandits. And the dicier the borrower, the tougher the market will become.
It is sobering to consider that the bond market’s annihilation of a serving prime minister after just 44 days in office occurred in one of the safest, most liquid and highly rated debt domains – namely, the AA-rated UK government bond, or gilts, space. So although high-yield borrowers are very likely to experience a large default cycle care of a massive increase in interest rates, current spreads are not pricing this in. This may reflect the very low levels of liquidity available in high-yield bonds, with many investment banks commenting that the primary new issue market is all but closed despite a wall of maturities looming in 2023 and 2024.
With the bank bill swap rate at over 3 per cent, the all-in yield on the new CBA hybrid is an attractive 5.9 per cent . If you issued the same hybrid on the same spread last year, your all-in yield would have been about 3 per cent. So the outright yield play is attractive even though the spread appears too tight.
The Australian Bureau of Statistics’ employment data confirmed a clear slowdown in employment growth in September coupled with a small 0.1 percentage point increase in the jobless rate.