Tuesday 10 March 2015 by Lincoln Tragardh Week in review

From the Trading Desk

This week: A raft of Aussie data; strong jobs numbers in the US move the markets; flows from last week; Fortescue announces a bond buyback; and an updated research report for Mackay Sugar.

Economic wrap

Domestic markets last week were interesting to watch, with a raft of data releases:

  • Building Approvals for January came in well above expectations of a 2% decline, at a 7.9% increase for the month
  • Gross Domestic Product (GDP) was also released for Q4 2014 at 0.5%, or 2.5% as a year-on-year figure – broadly in line with expectations
  • As reported last week, the RBA left cash rates on hold, which came somewhat as a surprise to markets. The RBA however maintained their dovish tone, signalling that further rate cuts are likely
  • Retail Sales data was also released for January with sales up 0.4% for the month, consistent with expectations

Offshore, news around Greece’s possible default has been less prominent lately, as economic reforms are being finalised so that Greece can secure further emergency funding. However, the latest news coming from European officials is that Greece’s proposals are far from adequate and that further funding is unlikely to be granted this month.

Looking at the Eurozone more broadly, the European Central Bank affirmed the plans of its Quantitative Easing program with bond purchases commencing this week. Its plan is to make purchases of assets to the value of €60bn per month, predominantly in Eurozone sovereign bonds. In its endeavour to keep rates low, it will make purchases on bonds with yields down to as low as -0.20% with maturities from two to 31 years.

In the US, the big news item that impacted markets was the employment figure last Friday. Employment rose by 295,000 in February, above forecasts of 240,000. This corresponded to a fall in the unemployment rate from 5.7% to 5.5%. As is often the case these days, the better the economic news in the US, the worse the performance of the equity market and bond yields. The market interprets any positive news as bringing forward the date at which the Fed may start raising interest rates and, following the better than expected jobs numbers, equities fell and yields rose.

After seemingly finishing the week flat in our time zone, the AUD was sold off aggressively after the US employment figures were released, dropping by about a cent during US trade. With our dollar starting last week at 78.44 US cents, it closed the week at 77.16 US cents. Declines have continued, with the dollar trading below 77 US cents at the time of writing.

Our bond yields followed US yields almost one-for-one over the course of the week. Australian Government Bonds rose in yield, our 5 year finished 12 basis points higher at 2.031% and the 10 year bond 16 basis points higher at 2.636%. US Treasury bond yields were also up 12 basis points in the 5 year and 16 basis points in the 10 year, finishing at 1.690% and 2.242% respectively. As domestic markets began trading this week, yields were another 6 and 10 basis points higher, given the US employment data over the weekend.

Flows

Sydney Airport inflation linked bonds were our most heavily traded AUD bonds last week and we are left with some supply. The G8 Education floating rate note became available to retail investors, sparking increased two way flow. We were also active in the USD space, with good supply in our favourites; Fortescue, Newcrest, Virgin, Telstra, QBE and Leighton.

Indicative offer yields to maturity are shown below:

  • Sydney Airport ILB 20 – 4.99% (retail and wholesale investors)
  • Sydney Airport ILB 30 – 5.49% (retail and wholesale investors)
  • G8 Education FRN 18 (retail and wholesale investors) – we have good two-way flow following this bond becoming available to retail investors for the first time last week. FIIG can buy from clients at 101.40 and sell at 102.70
  • FMG USD 19 – 8.78% (wholesale investors)
  • FMG USD 22 – 10.21% (wholesale investors)
  • Newcrest USD 21 – 4.50% (wholesale investors)
  • Newcrest USD 22 – 4.85% (wholesale investors)
  • Newcrest USD 41 – 6.27% (wholesale investors)
  • Virgin USD 19 – 7.02% (wholesale investors)
  • Telstra USD 21 – 2.33% (wholesale investors)
  • QBE USD 17 – 3.26% (wholesale investors)
  • QBE USD 21 – 4.58% (wholesale investors)
  • Leighton USD 22 – 4.47% (wholesale investors)

Fortescue bond buyback

Fortescue announced a bond tender last week. It is important for Fortescue investors to assess it and take the appropriate action. Further details of the tender are available in the article ‘Fortescue’s bond buyback – what you need to know’ from this week's WIRE.

Company research updates – Mackay Sugar (by Will Arnold)

The Mackay Sugar full research report has recently been updated and is available to both wholesale and retail clients by clicking here.

The Mackay Sugar 7.25% fixed rate bonds have a maturity date in April 2018 (with no call date) and are currently indicatively offered at a yield to maturity of 5.04%. The bonds are available to wholesale and retail investors with a minimum face value parcel size of $10,000.

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 or our general line 1800 01 01 81.

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