Monday 06 June 2016 by Casper Wolski Week in review

Trading Desk

USD fell in response to jobs data, RBA meets tomorrow and several bonds to mature this month

Economic Wrap

Australian Q1 GDP beat expectations last week with a +1.1% figure and a yearly figure above 3%. The RBA meets tomorrow, but is likely to keep interest rates on hold until after the next CPI data in July.

Weak US payroll data was the highlight of the offshore economic calendar last week. Non farm payroll rose by 38k versus expectations of 160k. Bond markets rallied, stock markets fell and expectations of a further Fed hike have been pushed back to September. The USD fell after the jobs data, lifting the AUD to 0.7350.

US Government Bonds are lower in yield on the week with the 10 year at 1.70%, at the bottom end of the recent range. Fed Chair Yellen speaks in the US today, and we expect her to reaffirm that a rate hike will be appropriate if supported by economic data.

Other news:

  • On Thursday, the OPEC meeting finished without members’ agreement on production cuts. Global oil prices fell Friday with West Texas Intermediate (WTI) crude oil down 1.1% to $48.62 a barrel         
  • Switzerland voted against a proposal to award 2500 Swiss Francs to adults and 625 Francs to children. The proposal did have characteristics akin to government subsidy and the avoidance of deflation
  • Brexit opinion polls last week showed voters to be much more evenly split on whether the UK should stay in the EU. JP Morgan’s CEO Jamie Dimon stated that a Brexit “would be terrible for the UK”

Credit indices spreads were marginally wider over the last week, with the US Investment Grade (IG) index finishing just 1bps higher at 77.5bps. Meanwhile the US High Yield Index (HY) widened by 5bps to 437.5bps.

Domestic interest rates are lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.80% and 2.35% respectively. The Australian iTraxx is at 128bps (or 1.28%, for this index of 25 Australian investment grade names), just 2bps wider over the last week.

Flows

This month welcomes several AUD bond maturities with Dalrymple Bay Coal Terminal, National Wealth Management and Genworth all returning cash to investors. We are seeing the funds being reinvested predominately back into investment grade names, with a common trade seeing clients selling their Genworth subordinated debt that is callable on 30th June to buy the new style subordinated line with a first call date in July 2020. Supply is currently available in the name and we have had success being able to facilitate sales out of the outgoing lines.

This week sees funds being paid back to clients for the recent tender on the Bluescope 2018 USD bond. Most clients have considered reinvestment options, both in USD and AUD. In USD, many clients chose to simply roll into the Bluescope 2021 fixed rate USD bond, while the Fortescue 9.75% secured 2022 and Virgin 8.50% unsecured 2019 USD bonds have also attracted interest.

The Virgin 8.50% 2019 unsecured USD bond benefitted from the credit positive announcement that the company has entered into a strategic alliance with HNA Group. The bonds rallied on the back of the news, with supply now difficult to source. We currently have a small amount of bonds to offer.

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