Following the US rally last Friday, credit indices spreads decreased a little but widened over the week. Domestically, Glenn Stevens RBA Governor gave the impression Australia is doing well at an address to the House of Representatives Standing Committee on Economics. In trading, we added a new subordinated bond to the DirectBond list, the MyState 2020 first call and BlueScope’s May 2018 USD bond continues to be popular
Economic Wrap
Fed Chair, Janet Yellen, appearing before the House Financial Services Committee last week, gave little away in terms of the debate on further Fed hikes versus the lower likelihood of this from recent market turmoil. This week US FOMC minutes are released which may give further clues on the views of the differing officials.
JP Morgan CEO, Jamie Dimon purchased shares in his firm Friday, and AIG (commercial insurer) announced billionaire John Paulson was joining their Board. These both helped improve the sentiment for financials.
US government bonds continue to yield below 2.00% (currently 1.75%). The continued demand for low risk investment grade bonds means it is taking longer to source and execute portfolios containing these securities.
Other overseas news over the last week:
- US Retail Sales showed improved consumer spending, sending US Markets rebounding on Friday. Oil prices and bank stocks both gained
- New York Fed member William Dudley stated the US economy remains healthy and the banking system is ‘clearly much stronger … than in the years preceding the financial crisis’
- Japan’s Nikkei has hit levels not seen since 2014, subsequent to the BOJ announcing its ‘negative interest rates’ policy
- Brexit (UK leaving the EU), is back in the media. As a reminder, the UK is in the process of negotiating its position and the ruling Conservatives have promised to hold a referendum before the end of 2017, and quite possibly as early as June 2016
Credit indices spreads decreased a little following the US rally on Friday. The US Investment Grade Index (IG) finished Friday narrowing 2.5 basis points (bps) to 122.0 (but widened 8bps on the week). The US High Yield Index (HY) decreased 16bps to 572 (but widened 20 bps on the week). As a reminder, the IG index is comprised of the Credit Default Swaps of 125 equally weighted names whereas the HY is comprised of 100 non-investment grade names. Changes in them are reflected in prices of securities of varying credit quality.
Events this week include: China returns from New Year celebrations and an upcoming G20 meeting in Shanghai on February 26 and 27.
Domestic market
Locally, RBA Governor Stevens spoke on Friday and gave the impression that Australia is doing well despite the troubled markets offshore. This is largely borne out by the corporate results released during February. He also hinted that there could be room for further rate cuts if necessary, although most economists are still expect the prevailing 2.00% cash rate to continue for several months.
Domestic interest rates were lower over the last week, with the AUD 3 and 10 year swap rates currently at 2.06% and 2.61% respectively. The Australian iTraxx is around 171 basis points (bps) or 1.71%, for this index of 25 Australian Investment Grade names. Our iTraxx had a similar performance to its US peers, being 2.5 bps narrower on Friday but 20 bps wider on the week (Friday to Friday).
Flows
With the financials sector selling off in the last week and credit spreads continuing to widen, we are now seeing Lower Tier 2 considerably cheaper. Buying interest has been attracted to the higher yielding options in the various sub sectors: major banks, regionals and insurers. We also added a new DirectBond, the MyState Lower Tier 2 bond with a 2020 first call date. It is only a small issue, so supply is expected to subdue somewhat, while supply in other names remains very good.
In other trading, inflation linked bonds were the beneficiaries of investors looking for stable investment grade returns. The Civic Nexus 2032 inflation linked annuity and both the 2020 and 2030 Sydney Airport inflation linked bonds attracted most of the buying. We currently have some supply in these however, it is expected to be limited.
In the USD space BlueScope continued to attract buying after the company announced that it expects to deliver unaudited earnings ahead of guidance – see The WIRE article here. Virgin was also in the same situation after releasing strong half yearly results.