Monday 18 July 2016 by Leigh Winton Week in review

Trading Desk

Malcolm Turnbull expected to announce his cabinet today, Theresa May sworn in as the UK’s PM and investors take profits with better selling volumes in Qantas and Virgin lines

Economic Wrap

Geopolitical events in Nice, Turkey and Baton Rouge took centre stage at the end of last week. Nevertheless credit indices were stable and in some cases lower, emphasising the continued demand for fixed income products in a low interest rate environment. In Australia, Malcolm Turnbull is expected to announce his cabinet today with an increased presence of National party MPs.

The AUD is trading up at 0.7590 against the USD, with 0.7650 seen as the next resistance level. 0.7813 has been the high over the last 12 months.    

US government bonds are higher in yield at 1.55% for the 10 year, having rebounded 20 basis points from lows of circa 1.35% two weeks ago. Ten year Japanese government bonds are trading at negative 0.225% and 10 year German bunds are at a negative 0.01% yield. Ten year UK government bonds (gilts) are now at 0.835%, compared to 1.37% prior to the Brexit referendum vote.

Other news:

  • Stocks closed mixed on Friday, with European shares down 0.15% on the Eurostoxx and up 0.22% for the FTSE 100. US shares were also mixed, with the Dow Jones up 0.05% and the S&P 500 down 0.09%.
  • Theresa May was sworn in as UK PM. In her cabinet she has Philip Hammond as chancellor, Boris Johnson as foreign secretary and Amber Rudd as home secretary. Eurosceptic David Davis is in charge of negotiating Britain’s exit from the EU. 
  • New home prices in China increased in 55 cities in June, compared with 60 cities in May. The average price rose 7.3% YoY in June compared to 6.9% in May.
  • NZ CPI rose 0.4% in Q2 2016, less than the 0.5% market expectation. This increases the chances of a rate cut from 2.25% to 2.00% at the next RBNZ meeting on August 11 – until the weak number they had been expected to stay on hold.

Credit indices spreads were unchanged or slightly lower over the last week with the US Investment Grade Index (IG) finishing steady on Friday at 72.8bps, whilst the US High Yield Index (HY) decreased 14bps to finish Friday at 392bps.

Domestic interest rates are slightly higher, with the AUD 3 and 10 year swap rates currently at 1.79% and 2.19% respectively. Ten year Australian government bonds last traded at 2.00%, which is 12bps higher over the last week. The Australian iTraxx is at 111.5bps (or 1.115% for this index of 25 Australian Investment Grade names), which is 9bps lower on the week.

Flows

Flow into USD names was a highlight last week, with the AUD largely trading over 76 US cents. Coupled with an improved outlook for high quality Australian thermal coal, we saw strong buying in the Newcastle Coal 2027 first call USD line, given the yield on offer at over 11%.

We saw better selling volumes in the Virgin 2019 USD bond and the three Qantas AUD fixed coupon lines, as investors looked to book profits in what can be a volatile industry. This profit taking extended through to the Newcrest 2041 USD fixed coupon bond, which has benefitted greatly over the last few months with the contraction in yields and gold rally.

Investors seeking high quality options took interest in the recent Hyundai AUD senior bond maturing in June 2021, paying a fixed coupon of 3.5%. This has been added to our DirectBond list for wholesale investors and is available in A$10,000 parcels – refer to the factsheet for more information.

In FIIG originated deals, the chase for yield has continued, with fixed coupon lines being favoured in this lower rate outlook environment. As a result we have been better placed to offer floating rate lines, and currently have supply available in the SCT Logistics 2021 and Sunland Capital 2020 fixed coupon bonds, with yields of over 6% and 7% respectively.

Earn over
6% pa* with Corporate Bonds

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