Cash

In February, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 6.25%. The UBS Australia Bank Bill Index returned 0.5% for the month.

Australian bonds

The UBS Australia Composite Bond Index (All Maturities) returned 1.2%. The 3-Year and 10-Year bond yields ended the month at 5.9% (-15bps) and 5.7% (-24bps) respectively.

The Reserve Bank of Australia (RBA) in its quarterly ‘Statement on Monetary Policy' revised inflation expectations down to below 3.0%. While the tone of the statement was less strident, the tightening bias remains with global inflationary pressures still evident.

International bonds

The Lehman Global Aggregate Index (hedged, A$) returned 1.3% as yields fell. Weaker economic data weighed on yields throughout the month.

In the United States, the Federal Reserve left interest rates unchanged at 5.25%. Comments by former Federal Reserve Chairman, Alan Greenspan, that a US recession was probable by year end, and weaker economic data (Durable Goods and Housing) were the catalyst for the fall in yields. The US 3-Year and 10-Year bond yields ended the month at 4.9% (-28bps) and 4.6% (-24bps) respectively.

In light of Greenspan's comments and the response of equity markets to the up-tick in risk, it was surprising that corporate bond spreads, the premium investors receive over Treasuries for holding corporate debt, did not blow out substantially. While the market repriced speculative grade-credit and emerging market bonds (which are equity-like), spreads on some investment-grade credit actually contracted.

Investors appear to remain enchanted with corporate bonds, with default rates at their lowest level in 20 years.

In Europe, the European Central Bank (ECB) left interest rates unchanged at 3.5%. ECB President, Jean Claude Trichet, pledged "vigilance", the phrase he used to signal the previous five interest rate hikes in 2006, ahead of next month's decision on rates. European 3-Year and 10-Year bond yields ended the month at 3.8% (-10bps) and 4.0% (-11bps) respectively.

In Japan, the Bank of Japan (BoJ) raised interest rates to 0.5% (+0.25%). The BoJ cited strong economic growth (Q4: 4.8% annualised) and consumer spending that had  previously been lacklustre, but has started to show signs of life. Japanese 3-Year and 10-Year bond yields ended the month at 0.9% (+7bps) and 1.6% (-6bps) respectively. European 3-Year and 10-Year bond yields ended the month at 3.9% (+11bps) and 4.1% (+14bps) respectively.

Australian listed property securities

The S&P/ASX 300 Property Accumulation Index (-0.5%) underperformed the broader Australian share market. Historically listed property has generally outperformed in periods of market corrections/volatility. Over the past 20 years, listed property has only underperformed 8% of the days where equity markets delivered returns below -1.0%. All listed property sectors underperformed the broader markets. The best performing sector was Retail (+0.8%), the worst performing were Commercial (-3.4%) and Managers & Developers (-3.2%).

International listed property securities

The UBS Global Investors Index (hedged, A$ net dividends) returned -0.7%, underperforming Australian listed property (-0.5%). The only positive performing market was Singapore (+4.5%). All other markets were negative despite the fall in bond yields.

Australian shares

The S&P/ASX 300 Accumulation Index returned 1.6% for the month. The best performing sectors were Consumer Staples (+6.3%) and Telecommunications (+3.9%). The worst performing sectors were Utilities (-1.5%) and Property Trusts (-0.5%).

Materials (+3.7%) and Energy (+3.6%) performed strongly as lead, nickel and tin prices all hit new highs during the month. Crude prices (+5.6%) performed strongly as mounting tensions over Iran's nuclear program pushed up prices.

Profit season continued to provide some support for the market. However, the ratio of upgrade to downgrades for large capitalisation companies has declined sharply. This means that there is less possibility of upward surprises, meaning that it will be harder for sharemarkets to deliver more of the same (+20%).

Merger & Acquisition (M&A) activity continued to dominate Industrials. APN News & Media (-1.8%) agreed to an increased takeover from Independent News & Media and private equity company Carlyle Group. Coles Group (+7.9%), after announcing lower profit guidance, put itself up for sale. Multiplex (-0.9%) received a takeover offer from Brookfield Asset Management.

International shares

The MSCI World Ex Australia Index (hedged, A$ net dividends) fell -1.1%, outperforming the unhedged index (-2.3%). The Australian dollar rallied on the back of strong commodity prices.

M&A activity continued to dominate international equities. During the month KKR announced the largest leveraged buy-out in history ($45 billion) for Texas power utility (TXU). M&A financing, as a percentage of total debt issued, is at its highest level in 17 years.

The US Market (S&P 500: -2.2%) was among the worst performers. There was a significant up-tick in volatility with the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market expectation of 30-day volatility, having its largest increase in its 17 year history.

Europe (MSCI Europe: -1.6%) also delivered weaker performance. UK (FTSE: -0.5%) was the best performing major market while Germany (DAX: -1.1%) and France  (CAC: -1.6%) were amongst the worst.

The Japanese equity market (TOPIX: +1.6%) was the best performing major market, after reaching a new six year high during the month.

Global emerging markets

The MSCI EM (in A$ with div reinvested) Index returned -2.3%.