Tuesday 14 June 2016 by Casper Wolski Week in review

Trading Desk

The Australian 10 year government bond trading at a record low, opinion polls show Brexit is much closer than expected and influx of recent Tier 2 issuance

Economic Wrap

Bond yields continue to fall as uncertain global conditions drive more money into fixed income. The 10 year Australian government bonds are trading at a record low yield of 2.065%, while 10 year Japanese and German government bonds trade at a negative 0.1625% yield and positive 0.025% yield respectively.

The AUD continues to trade closer to 0.7400, benefitting from USD weakness associated with a delayed Fed hike post US non farm payroll data.

US government bonds have broken out of the 1.70% to 2.00% range, closing at 1.64% on Friday and 1.61% yesterday.  The flight to quality continues and is expected to continue until we have a Brexit result and clearer picture on the next Fed hike.

Other news:

  • Stocks closed down both Friday and Monday with Brexit fears and the upcoming FOMC meeting looming
  • The Dow Jones closed Monday down 0.74% and the broader S&P down 0.31%
  • Opinion polls show the Brexit vote to be much closer than expected with some polls predicting a leave result. Bookmakers still show the remain vote to be in front, but event risk fear is leading to weaker GBP and UK stocks
  • The ECB has started buying corporate bonds as part of their QE program, which had previously been limited to mainly government securities
  • Microsoft purchased LinkedIn for USD26.2bn – the largest acquisition in its history – showing M&A is still alive, even with stock indices close to highs

Credit indices spreads are higher over the last week with the US Investment Grade Index (IG) finishing yesterday at 81.5bps, 2.5bps wider over the week. The US High Yield Index (HY) increased 20bps to finish yesterday at 446.5bps.

Domestic interest rates are lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.79% and 2.26% respectively.  The Australian iTraxx is at 129.75 basis points (or 1.2975% for this index of 25 Australian Investment Grade names), which is 3bps higher on the week.

Flows

Two DBCT 2016 lines matured last week, with two more meaningful maturities ahead this week in the National Wealth Management fixed and floating subordinated lines. These redemptions have left clients looking at reinvestment options, and unsurprisingly a lot of these funds are going back into other Tier 2 lines. The ME Bank, recent Bank of Queensland and Genworth Tier 2 lines have attracted the most interest. Clients looking for short dated options have been buying the Swiss Re fixed and floating old style Tier 1s, callable in May 2017.

There has been numerous activity in Tier 2 issuance recently, and with that we have today been able to add another option to our DirectBond suite. This comes in the form of the Westpac fixed coupon Tier 2, first callable in June 2023 with a final legal maturity in June 2028. This line pays an annual coupon of 4.80% and currently yields around 4.2% to the first call date. A factsheet can be viewed here.External link - opens in a new window

In USD trading, the Virgin 8.5% 2019 bond benefitted from positive news, this time with the announcement that Air New Zealand will sell part of its stake in Virgin to Nanshan Group, which will take on a 19.98% share. The bond again traded higher on the back of the news and we are seeing good two way client flow, with clients both taking profits and others attracted by the credit positive announcement.