Tuesday 12 May 2015 by Lincoln Tragardh Week in review

From the Trading Desk

Volatile markets follow the RBA rate cut; strong supply on the back of the latest FIIG-led new issue; weekly flows; and company updates for Kinross Gold, Transfield Services and Qantas

Economic wrap

As many had expected, the RBA cut the official cash rate by 25 basis points (bps) to 2.00% last week. What came as a surprise to markets was the lack of forward guidance on interest rates in the accompanying statement. On the back of this, bonds sold off with yields moving in the opposite direction of the rate cut, as the lack of guidance was interpreted as an end to the RBA’s easing bias.

Adding further to market volatility was some mixed data releases. Building approvals surprised on the upside, with approvals up 2.8%, compared to a 3.2% contraction in the previous month. We saw the unemployment rate increase by 0.1% to 6.2%, largely in line with expectations. Finally, retail sales grew by a less than expected 0.3%, compared to a previous figure of 0.7%.

In an attempt to calm interest rate markets, the RBA signalled its intention to clarify their position in their quarterly Statement on Monetary Policy, released last Friday. The statement, once released, was quite dovish and affirmed the board’s easing bias, citing a lowered GDP growth forecast, higher expected unemployment and lower business expenditure. Bond markets rallied slightly on the back of the release, with yields a few basis points lower, however expectations had been largely realigned by the time the statement came out.

In currencies, the AUD opened last week at 78.39 US cents and closed the week at 79.32 US cents. Given how markets interpreted the RBA’s rate cut without any forward guidance, the AUD rallied mid-week to a peak of 80.26 US cents, however clawed back as views on the RBA’s monetary stance were reassessed. 

Bond yields spiked both before and after the RBA’s rate decision on Tuesday, and continued to rise throughout the week, before retracing around the time of the Statement on Monetary Policy release last Friday. Both five and ten year Australian Government bond yields rose by 12 bps over the week to finish at 2.25% and 2.84% respectively. With the market’s reaction to the RBA over the week, ten year yields hit a five month high of 3.03% last Wednesday, before retreating by week-end.  For further detail on the recent spike in yields, please refer to the link below “Reassess or reaffirm – Interest rate strategies for your portfolio” where we look at the recent yield moves and how they relate to your portfolio.

Flows

FIIG last week launched a $25m bond issue for CML Group Limited, an ASX listed provider of finance, payroll and recruitment services. The 6 year notes pay an initial coupon of 1 month BBSW+5.40% and were very well received by wholesale investors.

As is typically the case around new issues, we have good supply across a range of names, as a result of investors selling existing holdings to add new issue exposure. For more detail on this and to view a list of available bonds please see the article “Best Bonds Right Now” linked below.

Indicative offer yields to maturity are listed below for some retail bonds that we now have good access to:

  •  DBCT(DALRYMPLE)-6.25%-09Jun16
              3.55%
  •  DBCT(DALRYMPLE)-BBSW+0.25%-09Jun16
              3.55%
  •  JEM (CCV)-IAB-0%-15Jun22
              4.35%
  •  JEM NSW Schools IAB-0%-28Nov35
              5.08%
  •  JEM SOUTHBANK-IAB-0%-28Jun35
              5.13%
  •  NATIONALWEALTH-BBSW+0.63%-16Jun16c
              3.65%
  •  PAYCE-9.5%-3Dec16c
              4.57%
  •  Praeco-IAB-0%-15Aug20
              4.50%
  • SYDAIR-ILB-3.76%-20Nov20
              5.05%


Yields on Inflation Linked Bonds (ILB) and Indexed Annuity Bonds (IAB) assume 2.50% inflation.

Kinross Gold reports solid first quarter result, but highlights concentration risk

Last week Kinross Gold reported their 1Q15 results. The USD March 2024 bonds are available at an indicative YTM of 6.63%.

Qantas turnaround well on track

After a turbulent period for the national airline, we believe Qantas is well on track to turning around its performance.

The difference between its cost base and that of its competitors is narrowing, the benefit of lower fuel prices is flowing through to the bottom line and the company is on track to reduce debt by $1bn as previously guided, by financial year end. The recent rise in yields presents good buying opportunities across the Qantas curve, with the 2020, 2021 and 2022 bonds indicatively yielding 4.78%, 5.35% and 5.46%; respectively.

We believe there is a good chance that the company will restore its investment grade credit rating within the next 12 to 18 months and so now represents a good opportunity to take advantage of the current high yields offered on Qantas. 

Transfield Services update

Last week, Transfield Services posted an update to the ASX from a recent conference presentation, confirming the business turnaround is well progressed.  The USD May 2020 bonds are indicatively offered at 5.97%. 

The most recent Transparency Report is available here. 

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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