Monday 20 June 2016 by Casper Wolski Week in review

Trading Desk

Brexit takes centre stage, a US Fed member says just one rate increase for 2016 and new Westpac Tier 2 bond added to DirectBond list and sees good volume buying

Economic Wrap

Brexit takes centre stage this week with the vote having repercussions for risk assets on a global basis. The result should be known on Friday morning Australian time.

Implied foreign currency volatility, which helps assess how much a currency might move after an event, has never been higher in GBP with volatility cited at above 100%. The number is annualised but represents a minimum expected move of 5.5 big figures in the Pound against the USD around the referendum. Note: GBP/USD is currently 1.4600, meaning 1 pound = 1.4600 USD, so a 5.5 big figure move would mean 1.4050 on downside from a ‘Leave’ vote, to 1.5150 on the upside for a ‘Remain’ vote. The AUD is trading above 0.7400 and is likely to be range bound until the Brexit vote result.

US government bonds are unchanged on the week at 1.645% for the 10 year, while Japanese 10 year government bonds are trading at negative 0.14% and 10 year German Bunds at just 0.02%.

Other news:

  • Stocks closed mixed on Friday with European shares +1% and US shares down 0.33% • Brexit polls slightly favour the Remain vote, with the Remain camp appearing to have received some benefit from the murder of the UK MP Jo Cox. Cox was an ardent supporter of remaining in Europe
  • US housing starts fell 0.3% in May, although permits to build increased which should lead to improved numbers ahead
  • US Fed member Bullard (St Louis Fed president) has toned down his thoughts on further US rate rises saying he favours just one more rise in 2016
  • Greece received further aid with Eurozone officials agreeing Friday to fresh loans totalling 7.5bn Euro

Credit indices spreads are slightly higher over the last week with the US Investment Grade Index (IG) finishing at 82.8bps, 1bp wider over the week. The US High Yield Index (HY) increased 8bps to finish Friday at 452.5bps.

Domestic interest rates are also a little higher over the last week, with the AUD 3 and 10 year swap rates currently at 1.82% and 2.32% respectively. The Australian iTraxx is at 129.5bps basis points (or 1.295% for this index of 25 Australian Investment Grade names), which is 1bp wider on the week. 10 year Australian government bonds are at 2.10% and the RBA releases minutes from its June meeting tomorrow.

Flows

The National Wealth Management fixed and floating Tier 2 lines matured last week, with clients looking at other Tier 2 options for reinvestment. As a result the Westpac fixed rate Tier 2, callable in 2023, which was added to the DirectBond menu last week attracted good volume buying. The larger $200,000 minimum parcel size is constraining demand slightly, but being one of the few fixed coupon Tier 2s available in AUD, the offer has been well received. While it is a relatively small issue for a major bank, supply is currently good. A factsheet with more details on the bond can also be viewed here.External link - opens in a new window

Infrastructure bonds received some renewed buying interest from investors looking for high quality assets that aren’t tied to the volatile economic cycle. The Praeco 2020 fixed coupon bond and MPC 2033 indexed annuity both were the main beneficiaries, with good volume buying in both names.

FIIG originated deals have also been attracting buyers as we’ve seen a credit compression in the high yield space. Our bonds have lagged the rally somewhat, so show good relative value, but supply is running thin in some lines. We also saw better volume buying in the non FIIG originated Adani 2018 line, compared to the 2020 bond. With supply somewhat scarce in the 2020s, the 2018s have been easier to access for clients who can look at the larger $200K minimum parcel size.

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