Last week, the ‘big 4’ banks increased their variable mortgage rates, to compensate for higher capital requirements due to be implemented mid-2016. Yields finished marginally lower, with government bonds down at 1.82% and 2.61% for the 3 year and 10 year respectively. In trading, the highlight was BHP Billiton bonds with four out of five lines added to the DirectBonds list
Economic Wrap
Last week’s big market mover was ECB Chief Mario Draghi, who suggested that further stimulus measures may be deployed this year. The ECB is currently undergoing a EUR60bn monthly quantitative easing program, also known as bond buying, aimed to encourage growth and push inflation back toward its 2% target. Draghi’s comments suggest that the ECB is poised to act in December through a combination of interest rate cuts and expansion to their current quantitative easing program. Bonds rallied by about 7 basis points (bps) after the remarks, with risk assets also benefitting from the expectation of lower rates.
Domestically the news on most people’s radar was the major banks completing a cycle of interest rates hikes, irrespective of the RBA cash rate. Westpac, NAB, CBA and ANZ have now all raised their variable mortgage rates by 20, 17, 15 and 18 bps respectively. Markets have used this round of effective tightening as reason to anticipate the RBA cutting rates sooner to offset the changes in housing finance, while being able to effectively deliver stimulus to other parts of the economy. Futures markets now expect a 52% chance of a rate cut this year, compared to the 33% chance that was implied before the mortgage rate rises.
The week saw an interesting close on Friday, with China delivering surprise rate cuts to lending and deposit rates of 25bps in an attempt to counter slowing growth and inflation. The Reserve Ratio Requirement (RRR) for banks was also cut by 50bps to 17.50%, to shore up liquidity amid continued capital outflows.
Domestic yields were marginally lower over the week, with the short end slightly more affected given central bank news and the realignment of short term policy rate expectations. The 3 year Australian government bond was down 2bps to 1.82%, while the 10 year was down just 1bp to 2.61%. The Australian dollar was also down slightly, finishing the week at 72.16 US cents, a drop of half a cent.
Looking ahead, we have the FOMC’s rate decision on Wednesday night, where it is expected the US Federal Reserve (Fed) will keep its interest rate on hold. However, the deadline is slowly approaching for the US Congress to raise its debt ceiling before government expenditure needs to be cut. Although the extension of the debt ceiling is most likely to be passed, there will be increased coverage of the issue. So, it is unlikely the Fed will move rates during this period of heightened political uncertainty. Markets will be paying close attention to any clues to suggest which direction the Fed will take in December or whether a rate hike will be delayed into 2016.
Flows
Our BHP Billiton (BHP) foreign currency bonds have taken centre stage. The two USD lines were first to be added to the DirectBond list and we can now also offer the GBP line and the EUR 2024 call bonds, as per the descriptions below:
BHP BILLITON-6.75%-20Oct25c-USD
BHP BILLITON-6.25%-19Oct20c-USD
BHP BILLITON-5.625%-22Oct24c-EUR
BHP BILLITON-6.50%-22Oct22c-GBP
With an issue size of USD6.42bn, across a total of five issued tranches, liquidity is ample in the BHP bonds which have performed well since they were issued. Credit spreads have compressed which is representative of the fact that the market views the issue as good value. Please contact your FIIG representative for current pricing and availability.
As a result of BHP trades, some clients have sold out of other foreign currency bonds. However, some less commonly available bonds in AUD are now on offer, particularly in the inflation linked, investment grade space. We currently have supply in the Australian Gas Network (AGN) 2025 and the AAA rated ALE Group 2023* capital indexed bonds. In the indexed annuity space we are able to offer the following bonds: Australian National University (ANU) 2029s, JEM Southbank 2035s and MPC Funding (MPC) 2033s.
*This bond is available to wholesale investors only.