Monday 12 October 2015 by Casper Wolski Week in review

Trading Desk – Axsesstoday starts trading in the secondary market

Last week, the RBA kept rates on hold at 2% as expected and the FOMC released its September minutes. Market expectation lowered for a Fed rate rise in 2015 so the AUD climbed and non-AUD bonds were actively traded. The Axsesstoday 2020 floating rate notes commenced trading in the market and we added Barminco Finance 2018 to the DirectBonds list

Economic Wrap

As expected, the Reserve Bank of Australia (RBA) left cash rates unchanged at 2% at its meeting last week. Markets were pricing only a 5% chance of a rate cut. RBA Governor Glenn Stevens largely attributed the rate hold to, “further softening in conditions in China and east Asia, but stronger US growth”, and “key commodity prices [being] much lower than a year ago”. Additionally, the speculation surrounding a possible US rate hike has given the RBA reason to remain cautious as if the Fed goes this will increase volatility in what is already considered to be a fragile global market.

The Federal Reserve Open Market’s (FOMC) September minutes were released last Monday, providing key insight into its decision to leave rates unchanged. Global growth concerns and low inflation were the main reasons for the rate hold; however, the minutes had an overall hawkish tone. Most recently, Federal Reserve Vice Chairman Stanley Fisher has said that the US economy may be strong enough to cope with an interest rate increase by year end. Last week’s US non-farm payroll report pushed back market expectations for the Federal Reserve’s next rate hike, with markets pricing in a slight 10% chance the Fed will raise rates at its upcoming October meeting.

Interesting, over the course of last week, Goldman Sachs, Deutsche Bank, and BNP Paribas all announced their belief in the ‘lower for longer’ outlook for markets, joining Barclays, TD Bank and, of course, this is also our house view. The banks’ outlooks were announced in conjunction with the IMF’s World Economic Outlook report, which stated that global growth was set to be lower than last year. Clearly, there is increasing market sentiment that for the foreseeable future, both global growth and interest rates will remain at historical lows.

As a result of market expectations of a US rate rise this year falling, there was a risk-on rally. Late last week the Australian dollar (AUD) jumped to 73.36 US cents (now at 73.38 US cents), climbing 4.1%, the biggest advance since 2011. Bonds sold off in response, with yields 12 basis points higher as investors exited safer assets. With less volatility the iTraxx closed 8 bps tighter at the end of the week at 122.995. 

Flows

The Axsesstoday October 2020 call floating rate note recently issued through FIIG started trading on the secondary market last week. There is limited supply currently, but it is available at an indicative yield to maturity of 8.715% to wholesale only clients.

With the AUD higher, non-AUD bonds on offer were actively traded. The BlueScope May 2018 fixed rate bond remained popular with almost $2m traded across the week. Supply in this bond is steady and it is available to wholesale clients in USD10,000 minimum parcel sizes. 

As higher yielding US bonds were popular Fortescue Metals (FMG) rallied. The FMG November 2019 fixed rate bond traded 12% higher in price from September. Clients took advantage of the strong bid and exited positions to take profits. 

Barminco Finance Pty Ltd June 2018 fixed rate bond was added to the DirectBonds list last week. This USD bond is available to wholesale clients only in USD10,000 minimum parcel sizes. It pays a 9.00% fixed rate coupon semi-annually. Barminco Ltd is a leading Australian underground hard-rock mining contractor providing the following mining services; underground contract mining, diamond drilling, crushing and screening.

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