Wednesday 30 January 2019 by Elizabeth Moran Opinion

Bondcast - 30 January 2019

This week our experts discuss the bond market’s reaction to the US government shutdown and what they see as attractive in the AUD and USD space

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Speakers

Jake Koundjakin-spaceJake Koundakjian 
Director, Fixed Income Sales

Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.


Liz Moran- space
Elizabeth Moran
Director – Education and Research

Elizabeth has been with FIIG for ten years and for much of that time has been a corporate and bank analyst. In recent years her passion for education has seen her role shift, to author/ edit FIIG’s “The Australian Guide to Fixed Income” and an online fixed income course for Financial Advisers. She continues to edit FIIG’s weekly newsletter, “The WIRE”.

In her role as Director of Education, Elizabeth has delivered presentations at conferences across Australia. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings, writing daily press releases for Bloomberg. Elizabeth spent five years in London, three working as a credit rating analyst for NatWest Markets.

Transcript

Hello. Welcome to another edition of BondCast. My name is Elizabeth Moran I'm director of research and education here at FIIG. And with me today I have Jack Koundakjian and Steve Mackie. I thought we would start today by talking a little bit about the macro scene with the US government shutdown. Actually they're back in operation now aren’t they?

 Jake: So yeah I guess it's certainly a negative for the economy. It could be up to 0.5% cut on their GDP because of the shutdown and certainly not something that the economy really needs is more negative confidence breaking type activity. So yeah it's good to see that 800,000 employees are now back on the payroll and certainly probably a lot of them are going through a very tough, difficult time.

[00:00:48] Elizabeth: Have you seen any reflection in the bond markets due to the shutdown?

[00:00:52] Jake: I haven't seen anything specific. There's been nothing specifically reflected through say the U.S. 10 year Treasury yields.  There are some sectors that will be influenced economically speaking and some specific names like Sprint that are subject to regulatory approvals for a possible merger with T-Mobile. So while these government agencies are shut down, they are the agencies making the decisions on whether Sprint and T-Mobile can merge together. They can't make these decisions if they're shut down.

[00:01:22] Steve: I'd say, look at 10 year government bonds, they are on the low end of the yield branch we've traded over the past six months.  I’d say people are still sitting on their hands at the moment, not really willing to make a call on it one way or the other. In saying that, economic data looks OK. This month's payrolls report, were 300,000 putting the stock market through a 3% rally on the day. So I think you know the sentiment is there, but there's enough things to keep people on edge particularly with Trump pushing the wall agenda very hard.

[00:01:59] Elizabeth: So what are you two finding attractive in the market at the moment for your clients?

[00:02:03] Jake: Well it’s always tough, maybe not always, but it is tough to find good value.

[00:02:08] So track back a couple of years ago, my shopping list was much, much longer as the economy has progressed and now my outlook is a lot more dim than it was then. I have to be much more selective and a lot of things look expensive to me. So my shopping list is relatively short. I guess in the U.S. dollar space I'm attracted to gold specifically the issuer, IAMGOLD.

Who happens to have a lot of liquidity on their books which makes me comfortable. It is a sub investment grade bond but it's yielding about 7%. So we're getting quite well paid for the risk that we're taking I believe, especially given the way that gold's been acting and it is becoming a safe haven. It seems to be acting like a safe haven with the price going from the USD1240s through the USD1300. So that I find attractive. Barminco also with a 6.6% yield, that's double BB rated although sub investment grade. Three years left and trading under USD100.  In the Australian dollar space, a lot more difficult to find really good value.  AMP, because the name is being dragged through the mud, is showing me about a 4.5%.

[00:03:18] I find that attractively valued.  Also selective RMBS lines, residential mortgage backed securities I'm finding attractively valued.

Elizabeth: What's happened with the AMP price since it issued?  Is it is trading up above par or around par?

[00:03:35] Not much. Not much has actually happened. It's pretty flat. I really expected given how negative headlines had been, to see some kind of volatility on the actual bond but it's been you know a 1% variance, I'd say from IPO. Any reflection from you Steve?

Steve: It's a big brand in Australia and AMP unlike the majors that obviously are supported by the four pillars policy I think for me with AMP, there's still a lot more legal risk attached to it. Until we really see the outcome of the Hayne Royal Commission report. I still think there's a bit of a risk with AMP, for me personally. So you know it's still not a name that I'm adverse to but am conscious that it was traditionally a life insurance company and branched out to varying sectors including funds management and a focus on property.

But I think that barriers to entry that they traditionally had in life insurance no longer exist and it's a pretty competitive space. So I think, as an allocation into your portfolio of investment grade, it's worth including in there. But again I also like regional banks. I think we’ll see a lot more T2 debt get issued. So I think investors can expect to see Tier 2 debt coming around 4.5% particularly from those regionals.

Elizabeth: I think that’s decent pay for the risk.

Jake: I hope so

Steve: Yeah well if you have a look at BBSW, the spread over the cash rate has been widening. It's actually the widest it's been so buying any BBSW linked product it's actually a good environment for investors to be buying at the moment.

So, I think bank cost of funding is going to continue to go up as the banks are being forced into buying safer assets on their balance sheet. Traditionally they could have bought other bank names but they're being forced to hold government bonds and they're lending criteria is tightening up as well. So I think that banks are getting safer and their funding costs are getting higher which means they're borrowing off our investors at a higher rate. So keep an eye on the financial sectors this year.

[00:05:45] Elizabeth: And what about the US dollar space Steve, are you still interested there?

[00:05:51] Steve: I think so more broadly, any bounce in the Aussie towards USD72 to USD73 I am happy to go back into the US. Names specifically, I’d again focus on some of those investment great names that you've seen or the bigger brand names such as the Virgin bonds, the Adani US line as well. Again it trades very cheaply relative to where the Aussie dollar bonds are trading at the moment. So there's still value out there.

Like Jake was saying, I think you've got to be selective in what you're putting in the portfolio at the moment. Anything that's connected to the US consumer as we've seen Sears crash out and J.C. Penney obviously has not been a good ride. So I think you know they are the sectors we want to steer away from.

[00:06:32] Elizabeth: And you mentioned Steve, the Hayne Royal commission report, it's actually due out next week. What are we thinking? Have we priced in enough downside or have the markets priced in enough downside?

[00:06:46] Steve: I think it’s going to take the market a while to digest that. But you know whether or not there is any actual findings etc and as we've seen in the US and the UK markets can take years for these lawsuits to actually come out but you know we're traditionally not as litigious as those markets. So I think what's pricing in terms of legal costs is probably in the market at the moment. But, I can imagine there's a few law firms out there rubbing their hands at the prospect of some legal action. Jake do you have any thoughts?

[00:07:21] Jake: Well, I think there is a lot already quite priced in. I think people are expecting some really negative headlines to hit the big four and the base of the financial industry generally speaking. So I think there is a lot of negative priced in. I’ll wait to read and garner rather than speculate. Yeah I think a lot is priced in already.

[00:07:45] Elizabeth: I think they're very kind now releasing the report to the public on Monday instead of Friday. We will get to have a decent weekend. Well, that wraps up another edition of BondCast. Thanks for joining us and we look forward to your company next week. Thanks.

 

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