The RBA kept rates on hold last week, reducing market expectations of a rate cut this calendar year. Whereas, in the US a future rate raise is supported by the positive employment figures released on Friday night. The AUD fell on this news while government bond yields moved higher. In trading, ANZ’s recent capital raising at good margins has forced other subordinated debt to reprice
Economic Wrap
Last week’s major domestic news was the RBA’s decision to leave the cash rate unchanged at 2%. Markets weren’t expecting a move from the RBA prior to last week’s inflation figures, but weak inflation data meant that the prospect of a rate cut was back on the table at last Tuesday’s RBA meeting. The Board’s accompanying statement referenced the weak inflation outlook, which may afford scope for further easing. The next CPI data is not due until the end of January and we think it unlikely the Board would entertain a cash rate cut before release of that data.
US Market
On Friday night US employment figures were released, which were very positive with 271,000 jobs added to non-farm payrolls in October. The participation rate held steady. The additional jobs added, which were double that added in the previous month, resulted in a 0.1% drop in the unemployment rate to 5.0%. Also importantly, underemployment fell from 10.0% to 9.8% and average hourly earnings rose by 0.4% after flat-lining in September. This data release supports the US Federal Reserve’s case for a rate rise. With underutilisation of the labour market and weak inflation representing key areas of concern for the Fed, the strong employment and wage increase numbers make a December rate hike highly likely.
The US employment data supports the RBA board’s ‘wait and see’ stance. The devaluing impact on the AUD of a more certain US Fed rate hike will work to support our economy and afford the RBA additional time to make its assessment on its monetary policy actions.
Domestic market
Last week ANZ made a similar move to what we have seen across the sector recently and raised additional capital. This was in line with APRA’s increased capital adequacy requirements that mean major banks need to raise additional funds to offset residential lending, which we have already seen primarily in the equity markets. ANZ last week raised $600m through a 10.5 year, non-call 5.5 year, Basel III compliant subordinated bond. This was priced at a margin of 2.70% over 3 month BBSW. As a result we saw existing new-style subordinated debt from major banks cheapen in the market by about 20 basis points (bps).
Yields were higher over the week, as the RBA held the cash rate. Australian government 3 and 10 year bonds were 16bps higher in yield to finish the week at 1.97% and 2.79% respectively. Given the employment figures out of the US on Friday, domestic yields followed global moves to open this week 10bps higher again. The AUD was set to finish the week relatively flat around 71.4 US cents, but the realignment of US Fed rate hike expectations late on Friday triggered a 1 cent sell off so the AUD finished the week worth 70.4 US cents.
Flows
With the sell-off in bonds last week, yields were looking attractive and investors took advantage of longer dated inflation linked securities that were on offer. Both the Sydney Airport 2030 inflation linked bond and the Royal Women’s Hospital inflation linked annuity are now available to clients at indicative yield to maturity of 6.04% and 6.18% respectively, including an inflation assumption of 2.5%.
As previously mentioned, major bank subordinated debt was repriced in the market given ANZ’s new issue. With margins now around 20bps wider, investors are taking advantage of the value offered and increased margin compared to old-style subordinated debt.