Switches out of existing FIIG originated bonds into new Axsesstoday, Integrated Packaging Group and PMP, mean we have good supply in other FIIG bonds. Key highlights in markets were: a revision for US GDP, Volkswagen’s emissions scandal, Tsipras’ party returns to Greek parliament and the AUD was down, once again
Economic Wrap
Given the dovish accompanying statement to the FOMC’s recent decision not to raise the Fed Funds rate target, it is now interesting to see a number of voting members publicly expressing their hawkish views on a future rate rise. Federal Reserve Chairwoman, Janet Yellen, delivered a speech last Thursday which said that most FOMC members anticipate that achieving the Fed’s mandate of 2% inflation and low unemployment “will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter”. A revision to second quarter US GDP released on Friday also supported the statement, with growth revised up by 0.2% to 3.9% annualised. This was driven by consumer spending, business investment and construction.
Markets were shocked by Volkswagen’s (VW) admission that they had cheated on emissions tests globally, misinforming regulators and consumers about the pollutants emitted by as many as 11 million of its vehicles. As US law stipulates, the Environmental Protection Agency could fine VW up to $37,000 per affected car. There are 482,000 diesel powered VWs in the US, potentially costing the company over $17bn. Though it’s unlikely the eventual fine would be at the top-end of what is permitted, it is expected to be significant and VW’s share price has taken a beating as a result, falling from EUR160 to EUR110.
Bondholders have also taken a hit on the news, with credit margins spiking around 170bps, with yields now approaching 5% on VW’s 2019 Australian issue. In capital price terms this is a drop of around 7%, reflecting the more secure nature of the asset class when compared to losses upwards of 30% incurred by shareholders.
Alexis Tsipras’ Syriza party returned to government last Wednesday, following another successful election in Greece. The return of Tsipras, who agreed to the third bailout package, indicates general support for bailout-dependent austerity measures and was a positive for markets. The terms of Greece’s third bailout package require 56.4% of the austerity measures to be implemented within the next three months. This includes: pension cuts, tax increases and the privatisation of public assets. Despite Tsipras’ promise to implement these measures, there are still concerns over the sustainability of the debt, at 180% of GDP, and the IMF’s refusal to endorse the third bailout package.
Over the week, the yield curve flattened slightly. In Australia, the short end was quite flat with the 3 year government bond up less than 1bp to 1.91%. Our 10 year was slightly more volatile and finished 3bps lower at 2.69%. The Australian dollar gradually declined over the week to finish at 70.24 US cents, down 1.7 US cents. Credit spreads were wider at the end of the week, with the iTraxx around 5bps higher at 129.63.
Flows
FIIG deals remained the focus last week, with a further transaction launched for Axsesstoday. With clients bidding into the new deal, we have good supply in existing FIIG bonds as clients look to reallocate. Some lines that have been difficult to source have now become available; among them are CBL, 360 Capital and W.A. Stockwell.
Additionally, we have had some interesting trading in the existing PMP bond which is being called by the issuer next month. With PMP officially announcing its call notice, we are seeing good two-way flow as clients look to reinvest their soon-to-mature bond, while other investors see a valuable short term opportunity. With the chance to buy at slightly over the redemption value and receive the 8.75% coupon in less than a month, clients are seeing a secure short term investment as an alternative to deposits and liquid cash.
In non-AUD trading, BlueScope was popular, having recently been added to our DirectBonds suite. It has less than three years to maturity in May 2018 and a high yield to maturity of 6.45% per annum. The minimum parcel is $10,000 and is available to wholesale investors only.