Monday 29 August 2016 by Casper Wolski Week in review

From the trading desk

Global central bankers insist on running in circles, lack of volatility continues in domestic credit and Kinross added to our DirectBond list

Economic Wrap

The Economic Policy Symposium hosted by the Kansas City Fed in Jackson Hole was eagerly anticipated by global markets. Fed Chair, Janet Yellen spoke on Friday night and didn’t give too much away saying, “the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time”  but went on to highlight that, “I believe the case for an increase in the federal funds rate has strengthened in recent months.”

This was further reinforced by the Vice Chair, Fischer on CNBC, who went so far as to say that September is a live meeting and the Fed could hike twice before the end of 2016. Expectations of a September rate hike have jumped from 24% to 36%.

Governor Kuroda said the Bank of Japan would continue to ease policy as required across their “three dimensions” of negative rates, asset purchases, and forward guidance.

Other news:

  • Global equities closed with mixed results driven largely by Jackson Hole – S&P500 down 0.2%, Dax up 0.6%, FTSE up 0.3%, ASX200 down 0.5%
  • US data was close to expectations with economic growth at 1.1% for the June quarter (exp. 1.2%), and initial jobless at 261,000 (exp. 265,000), although the July trade deficit improved markedly by US5.2bn to USD59.32bn
  • USD was stronger against major currencies following the comments from Fed officials with the AUD sitting at US75.42 cents down from US76.86 on Friday

Credit indices spreads were slightly higher over the week with the US Investment Grade Index (IG) finishing Friday up 1.5bps at 72.0bps, whilst the US High Yield Index (HY) moved sharply to finish Friday at 391.75bps – up nearly 10bps on the week but through a range of 380 to 394bps.  As a reminder, the IG index is comprised of the credit default swaps of 125 equally weighted names whereas the HY is comprised of 100 non investment grade names. Changes in them are reflected in prices of securities of varying credit quality.

US government bonds fell in price (higher yields), with US 10 year currently at 1.618%.  Japanese and German 10 year bonds were also weaker.

The increased  likelihood of US rate rises should reduce the impetus for the RBA to ease further according to Bloomberg, but AUD 3 and 10 year swap rates sit flat on the week at 1.64% and 2.10% (down 1bps apiece). The 10 year bond sits at 1.893%, slightly lower than last week, mirroring international counterparts. The Aussie iTraxx moved through an unexciting range of 99.60 to 101.80bps which reflects the ongoing lack of volatility in major domestic credit.

 Flows

Following Adani’s successful partial tender offer on their 2018 fixed rate bond, pricing moved higher.  Supply was difficult to secure, as holders speculate on further issuer buybacks. We saw better buying and supply in the 2020 line.  Some clients sold into the better bid, but overall we saw more buyers attracted by the company’s improved debt position.

We added a Kinross Gold fixed rate bond in USD to our DirectBond suite last week. The very long dated 2041 maturity is in addition to the existing 2021 and 2024 lines that we have available, all in USD10,000 minimum parcels. With a yield in the high 6% area, we had clients interested in moving out along the yield curve by switching from the shorter Kinross lines. Similarly, we also had clients looking for the yield pickup available in moving out the risk curve, while maintaining gold exposure, by switching from the investment grade Newcrest into Kinross which is rated BB+.

Fortescue reported full year results last week where it more than doubled net profit after tax. Following this, the company was upgraded by Moody’s, while today S&P revised their outlook on FMG to stable from negative. With the bonds rallying further, we saw sellers taking profits and moving into other higher yielding options, notably the TransAlta 2040 fixed rate USD bond.

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