This week: Volatile markets; Swiss National Bank unexpectedly abandons ceiling on the value of the Swiss Franc; bond rally continues; negative government bond yields mount; and bond flows for the past two weeks.
Volatility hit global markets again last week with instability in resource prices, the abolition of the currency cap on the Swiss Franc and surprising employment data in the domestic and US markets. Copper prices led losses last week, falling 6.2%, while crude oil rallied 3.9% on Friday to finish the week flat but with large swings throughout the week.
The Swiss National Bank shocked the market when it removed the ceiling on the value of the Swiss Franc. The Franc has been pegged against the Euro for the past three years at a maximum value of 1.20 Francs to the Euro, but with the ceiling removed the currency immediately appreciated around 30% to 0.85 Francs to the Euro and has since settled around parity with the Euro.
On the employment front, US jobless claims rose to 316,000 from 294,000 the week prior, the first time the figure has crossed 300,000 since November. Domestically, employment data surprised on the upside with 37,400 new jobs added in December, bringing the unemployment rate down 0.2% to 6.1%.
The Australian dollar traded within a wide range during the week, given the spike in volatility that was exacerbated by the Swiss announcement. Our dollar, however, managed to finish the week relatively unchanged at around US82.20 cents.
Given the instability in markets, bonds rallied over the week with yields continuing their downward trend. The 5 and 10 year Commonwealth Government bond yields dropped 9 and 13 basis points to 2.14% and 2.56% respectively (see below for further discussion on global government bond yields and the extent of the rally). The 5 and 10 year benchmark swap rates lagged to an extent, but both were down 1 and 5 basis points to 2.61% and 2.95% respectively.
Looking ahead to this week, we have new homes sales data as well as release of the Westpac Consumer Confidence Index. The all-important European Central Bank meeting will be held Thursday night with the market widely expecting QE to be announced. We also eagerly await Consumer Prices (CPI) next week.
The last two weeks have been dominated by trading among USD denominated securities such as Virgin Australia November 2019, Fortescue Metals Group (FMG) November 2019 and the Newcrest October 2022 fixed rate bonds. The strengthening of the Aussie dollar late last week saw the above issues become cheaper in relative AUD terms, prompting a flurry of activity. All three of the above mentioned names are in good supply but are only available to wholesale investors.
Sydney Airport’s November 2020 and 2030 capital index bonds (CIB) became available concurrently after supply of the 2020s emerged a little over a week ago, giving way to switches out of the longer dated 2030s. The yield differential between the two securities is currently at its tightest spread since late 2013, highlighting the relative value in the 2020s. FIIG is currently well placed to fill bid orders in both securities.
A number of FIIG originated bonds experienced increased activity after supply became available on the back of switches into high yield opportunities in the USD space. Most notable were the CBL April 2019 and Payce December 2018 fixed rate bonds with turnover of $3m and $2m respectively over the past two weeks. FIIG currently has access to the following high yield issues:
- 360 Capital September 2019 fixed rate bond (indicatively offered at a yield to maturity or YTM of 5.81%)
- Adani Abbot Point Terminal May 2020 fixed rate bond (indicative YTM of 5.49%)
- CBL April 2019 fixed rate bond (indicative YTM of 6.02%)
- Coffey International September 2019 FRN (indicative YTM of 6.76%)
- G8 Education March 2018 FRN (indicative YTM of 5.63%)
- PAYCE December 2018 fixed rate bond (indicative YTM of 6.52% or 4.82% yield to first call date)
Bond rally gathers momentum...
Bonds have rallied (i.e. yields have fallen and prices have risen) significantly over the past six weeks, particularly in the long end. Long dated Commonwealth government nominal and inflation linked bonds have seen a whopping 50bps decline in yield since the start of December. The mid yield on the Australian Government 4.50% fixed rate bond with a maturity date of 21 April 2033 was around 3.45% on 1 December 2014 and by 19 January 2014 was 2.95%. In price terms, this saw an increase of $7.35 from $114.35 to $121.70 or 6.4% price rise on top of the 4.50% annual coupon.
The Australian Government ten year bond yield touched 2.49% on 16 January 2015, the lowest yield on record.
Similar movements have been seen in Australian Government inflation linked bonds with the 20 September 2030 2.50% CIB rallying from a mid real yield of approximately 1.00% to 0.50% over the same period. Long dated credit and infrastructure bonds have also benefitted from this rally with material increases in price.
Is there more to go? Looking at government bond rates around the world (see chart below) it’s not hard to mount a case that there could be more tightening in Australian Government bond yields, with many global bonds currently trading at negative interest rates. This suggests a sustained period of low/no economic growth and makes the record low yields on Australian Government bonds still amongst the most attractive in the developed world.
Supporting this view was the news on Monday night that the International Monetary Fund (IMF) had made the steepest cut to its global growth outlook in three years, shaving 0.3% from its forecasts set out just three months earlier. The IMF now expects the world economy to grow 3.5% in 2015, down from 3.8% projected in October 2014.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. For more information, please call your FIIG representative.