Monday 21 September 2015 by Casper Wolski Week in review

Trading Desk – Fed decision drives Australian market, new retail bonds available

Last week’s most important news arrived late on Thursday night when the Fed left rates on hold in the US – we summarise the response from markets. In FIIG deals, two new bonds, both maturing in 2019, have become available to retail investors – the Coffey floater and 360 Capital fixed rate bond

Economic Wrap

Last week’s most important news arrived late on Thursday night when Federal Reserve Chairwoman Janet Yellen announced the Federal Open Market Committee’s (FOMC) decision to hold the US Federal Funds target rate unchanged between zero and 0.25%.

The Fed’s highly anticipated decision not to raise rates was primarily attributed to continued, albeit improving, under-utilisation of the labour force, concerns for sluggish inflation and global economic conditions putting downward pressure on domestic growth. Yellen elaborated during her press conference, noting that while the pace of job gains has been solid and the unemployment rate declining, inflation had fallen short of their long run objective.

In regards to the prospect of a future rate hike, Yellen stated that the Fed’s short run outlook had not shifted, with most members expecting that it will be appropriate to raise rates later this year. Interestingly though, four FOMC members now expect that economic conditions will not warrant a rate increase until 2016, up from two members previously. It was clarified that monetary policy will remain accommodative for quite some time after the initial rate rise, which is to say that the future path of increases will be more gradual than history suggests.

Internationally, Standard and Poor’s downgraded Japan’s credit rating from AA- to A+ on Wednesday (in line with rival credit rating agency Moody’s A1 rating), highlighting concerns surrounding Japanese growth and the Bank of Japan’s ability to reach its inflation target over the next few years. The downgrade came immediately after the Bank of Japan met to determine the country’s cash rate, deciding to leave rates unchanged despite concerns surrounding stagflation in the Japanese economy and the central bank’s continued accommodative monetary policy. Additionally, Standard and Poor’s also cut Brazil’s credit rating by one notch to BB+, maintaining a negative outlook on the country’s future credit worthiness. S&P also added that “the negative outlook reflects what we believe is a greater than one-in-three likelihood of a further downgrade due to a further deterioration of Brazil’s fiscal position”.

Domestically, the RBA released the minutes for its September meeting on Tuesday. Some downside risks were noted but there was little to suggest further rate cuts in the near term. The RBA is aware of global market developments and, despite the volatility in China, its outlook has not yet changed. In regards to the domestic market, a depreciation of the Australian dollar is working to offset declines in commodity prices and support growth, while the labour market is seen to be operating with a degree of spare capacity, with muted wages growth. Moreover, RBA Governor Glenn Stevens addressed parliament on Friday, indicating his relatively optimistic view of the Australian economy, claiming that a lot of the commentary surrounding our economy is “more negative than the facts actually warrant”.

Interestingly, the change in Australia’s Prime Minister had little discernible impact on domestic financial markets.

The Australian dollar had a volatile week around the Fed’s rate decision. It began the week trading at 70.86 US cents and appreciated by about 1 cent leading into the rate decision, before spiking another cent to 72.76 US cents after US rates were left on hold. The Australian dollar ended the week at 71.89 US cents.

Yields drifted higher over the week before correcting on Thursday night, as bonds rallied in response to the Fed rate-hold. Australian Government 3 and 10 year bonds were 6 basis points higher over the week to finish at 1.93% and 2.77% respectively, despite having dropped in yield by about 7 basis points after the US Fed news.

Flows

The two new FIIG transactions - for PMP and Integrated Packaging Group - meant investors sought to lighten exposures to existing FIIG deals. As a result, and as is typical on the back of FIIG-led bond issues, we have excellent supply in a range of existing high yield bonds at attractive levels. We also have some supply in other names that we would not traditionally see, so the post issue landscape continues to be favourable for those opportunistic buyers.

Also, on the FIIG-led front, we have two new bonds that have seasoned and become available to retail investors. These are the Coffey 2019 floating rate note and the 360 Capital 2019 fixed coupon bond. Both are available in minimum $10,000 parcels.

BlueScope is the latest addition to the US dollar denominated DirectBonds suite. This senior unsecured bond pays a fixed coupon of 7.125% and matures in May 2018. Please see our update here and contact your dealer for further information and pricing.

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