Monday 30 May 2016 by Casper Wolski Week in review

Trading Desk

The prospect of two further rate cuts puts more pressure on the Australian dollar, while evidence builds for a rate rise in the US

Economic Wrap

Australian 1Q GDP is due out Wednesday with expectations of a quarterly +0.6% number and a +2.75% yearly growth number. A weaker number will increase the likelihood of another rate cut in the coming months.

Election uncertainty in Australia and the prospect of two further rate cuts are putting more pressure on the currency, with the AUD now trading at 0.7150.

US government bonds are broadly unchanged in yield on the week with the 10 year yield at 1.85%. We are at mid range on the US benchmark bonds which have been stuck between ~1.70% and 2.00% for the last three months.

US unemployment data is due out Friday with non farm payrolls expected to increase by 160k.

There was some new kangaroo corporate issuance last week, with Hyundai (Capital Services) issuing a 5 year $350m fixed coupon bond and Ford issuing a 4 year $450m fixed coupon bond. Furthermore, Coca Cola is shortly expected to launch its own AUD issue, for which there are expectations of a $1 billion deal.

Other news:

  • US GDP growth was revised up to +0.8% in 1Q 2016. Stocks closed up with the Dow Jones up 0.25% and the broader S&P up 0.43%
  • Fed chair Janet Yellen spoke on Friday saying an interest rate rise is probably appropriate in coming months if economic data improves. Yellen speaks again on 6 June and the FOMC next meets on 14 June
  • The Observer newspaper poll shows 88% of economists believe Brexit will harm the British economy and PM David Cameron speaks this Thursday
  • Bloomberg cites the risk of a chain of defaults rippling through Chinese wealth management products (WMPs)

Credit indices spreads are lower over the last week with the US Investment Grade Index (IG) finishing Friday at 76.25bps, 7bps tighter over the week. The US High Yield Index (HY) contracted 26bps to finish the week at 432bps.

Domestic interest rates are unchanged over the last week, with the AUD 3 and 10 year swap rates currently at 1.85% and 2.41% respectively.  The 10 year Australian government bond yields 2.275% and remains close to its 2.229% record low recorded on 16 May. The Australian iTraxx is at 126.75bps basis points (or 1.2675% for this index of 25 Australian Investment Grade names), which is 5bps lower on the week.

Flows

There has been some renewed buying interest in the Swiss Re fixed and floating old style Tier 1 lines which are callable in 2017. With a number of bond maturities having just passed or coming up, clients are assessing where to reinvest for the shorter term. Swiss Re has been a long time favourite for FIIG clients due to the very strong credit profile and relatively short term to maturity. Additionally it is one of the last old style Tier 1 securities available, for those looking for better returns while avoiding the point of non viability concerns associated with new style options.

Adani Abbot Point traded in good volume last week following the ratings affirmation by S&P. Pricing creeped higher over the week as buyers outpaced what became limited supply, particularly in the 2020 fixed rate line. Many of the trades were clients taking profit on the Glencore 2019 fixed rate bond, which has seen a strong rally over the last couple of months. Clients were also looking to switch back into higher yielding alternatives.

Following on from strong passenger numbers, Sydney Airport saw some buying last week in the 2020 and 2030 inflation linked bonds. Their recent 2026 USD fixed coupon bond also became a talking point, with our AUD inflation linked lines pointing to better value relative to the USD counterpart. 

In the USD space NCIG attracted the most interest, with investors buying before the company updates the market on its capital restructure plans sometime in June. Supply is currently available, however pricing has moved slightly higher as the bonds become scarce and the market looks ahead to a positive company announcement.