Monday 11 July 2016 by Casper Wolski Week in review

Trading Desk

US non farm payroll numbers on the upside, Liberal coalition set to form government and market uncertainty sees increased buying of fixed coupon bonds

Economic Wrap

US unemployment numbers led to higher stock and bond prices (lower yields), as non farm payroll numbers surprised on the upside at +287k.

In Australia, the Liberal led coalition seems set to form government, although the actual number of seats they will hold and whether they will reach 76 seats for a majority is still uncertain.

The AUD is trading higher at 0.7550 against the USD, with 0.7610 seen as the next resistance level. A further interest rate cut is likely in Australia if the CPI numbers later in July remain weak.

US government bonds are lower in yield again, with the 10 year at 1.365%. 10 year Japanese government bonds trade at a negative 0.275% yield and 10 year German Bunds trade at negative 0.175%. Notably, 10 year UK government bonds (gilts) trade at 0.735%, compared to 1.37% prior to the Brexit referendum vote.

Other news:

  • Stocks closed higher on Friday with European shares up 2.0% (Eurostoxx) and 0.87% (FTSE 100), while US shares were up 1.53% (S&P 500).
  • UK Conservative party leader major candidates are Theresa May and Andrea Leadsom. Theresa May is currently the Home Secretary whilst Andrea Leadsom is a minister for energy and climate change.
  • China PPI fell 2.6% in June compared with a 2.8% drop in May. The decline was the smallest since Q4 2014.
  • Europe’s banks need a EUR166bn dollar bailout according to Deutsche Bank’s chief economist David Folkerts-Landau.

Credit indices spreads are lower, with the US Investment Grade Index (IG) finishing yesterday at 73bps, 4.5bps narrower over the week. The US High Yield Index (HY) tightened 20bps to finish Friday at 406bps.

Domestic interest rates are lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.75% and 2.07% respectively. 10 year Australian government bonds remain below 2.00%, trading at 1.885% which is 10bps lower on the week. The Australian iTraxx is 2bps tighter at 120.25bps basis points (or 1.2025% for this index of 25 Australian Investment Grade names). 

Flows

With current uncertainty around markets and an outlook for lower rates, we’ve started to see investors selling their floating rate exposures in favour of the certainty offered by fixed coupon bonds. With a global hunt for yield underway across asset classes, FIIG originated fixed coupon bonds are attracting the most buying due to the higher fixed yields available. We traded good volume across the Capitol Health 2020, SCT Logistics 2021 and W. A. Stockwell 2021 fixed coupon bonds, and are now generally left buyers of fixed rate FIIG deals.

The safe harbour approach of adding infrastructure exposure continued, with investors wanting to diversify away from the uncertain economic cycle. We had good volume buying in both Sydney Airport 2020 and 2030 inflation linked bonds, as well as a the Royal Women’s Health 2033 inflation linked annuity.

Coal infrastructure also saw good volume buying, with the AUD interest in the Adani 2018 and 2020 bonds. Supply is better in the 2018 line for those who can look at the A$200K minimum parcel size, otherwise we have been successful in sourcing some of the 2020 line in A$10K minimum parcels.

In USD coal infrastructure, the Newcastle Coal USD line with a 2027 first call date saw strong demand. With supportive coal prices and a hunt for yield, the NCIG looks attractive with bonds indicatively offered at over 11% as a yield. The large 12.5% coupon on the bond is also very attractive for those after income.