Monday 27 June 2016 by Casper Wolski Week in review

Trading Desk

Markets react to Brexit with a risk off frenzy, bond yields move lower and two SCT bonds now available to retail investors

Economic Wrap

The British referendum was undoubtedly the major economic topic last week and will remain so for a long time. The Brexit caused a risk off frenzy with equities lower, bond yields lower and a flight to quality with a stronger USD. A more detailed note on Brexit can be viewed here.External link - opens in a new window

The AUD is trading around 0.7400 and is likely to be under pressure as markets digest the chances of a further rate cut by the RBA.

US government bonds are lower again in yield at 1.505% for the 10 year.  Japanese government 10 year bonds are trading at negative 0.19% and 10 year German bunds at negative 0.05%.

Other news:

  • Stocks closed with large losses on Friday with European shares down 8.6% (Eurostoxx) and US shares down 3.5%
  • David Cameron is not expected to trigger article 50 of the Lisbon treaty this week when he meets EU ministers at an EU summit on Tuesday
  • US banks’ annual stress results were released at the end of last week with all 33 participants having passed
  • Moody’s cut the UK’s credit outlook to negative and downgraded Austria from Aaa to Aa1

Credit indices spreads are higher over the last week with the US Investment Grade Index (IG) finishing the week at 87bps – 5bps wider over the week – while the US High Yield Index (HY) was 7bps wider to finish the week at 459bps.

Domestic interest rates are lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.78% and 2.24% respectively. The Australian iTraxx is at 139bps (or 1.39% for this index of 25 Australian Investment Grade names), which is 10bps higher on the week. Australian government 10 year bonds are at 2.035% which is 10bps lower on the week, but included the 30bps tightening that we saw on Friday as a result of Brexit.

Flows

SCT Logistics – 2021 fixed coupon and 2019 floating rate bonds – seasoned last week and became available to retail investors. We have had a very good response to the new retail offering, with supply currently better in the floating rate note.

Following on from the recent subordinated, Tier 2 issue from Auswide Bank, we added an existing line to the DirectBond suite last week. This is the 2024 floating rate Tier 2 with a first call date in 2019 – a factsheet is accessible here.External link - opens in a new window While it is a similarly small issue to the more recent longer dated line, we currently have supply available.

FMG made a special $500M loan repayment last week. The company also commented that it was well placed “to pay down another couple of billion”. This was very positive for the company and we saw both the senior secured and unsecured lines rally as a result. Moody’s also upgraded the company’s outlook to stable following the debt reduction.