Monday 05 September 2016 by Casper Wolski Week in review

Trading Desk

Not much ado about nearly nothing – weaker data, stronger shares, flatter bonds

Economic Wrap

A key US labour figure, Non Farm Payrolls, fell markedly short of expectations at 151,000 compared to the expected 180,000. The debate on the Federal Open Market Committee’s (FOMC) next decision continues but markets are pricing a lower likelihood of a September hike. The implied probability of a December hike is 59% according to Bloomberg (as at 2/9).

In Germany, Chancellor Merkel’s party lost an election in her home state. The Christian Democrats Union fell to third place behind Social Democratic Party (the other major party), and the Alternative for Germany (AfD) party who garnered 21% of the vote according to exit polls. The AfD is a right wing organisation with anti immigration policies.

Other news:

  • Friday’s close brought stronger performances across global share markets following the US Non Farm Payrolls and the implication of ‘lower for longer’
  • Major American indices the Dow, NASDAQ, and S&P500 all closed 0.4% higher and the Dax, STOXX600, and FTSE were 1.4, 2, and 2.2% higher respectively
  • AUD/USD strengthened over the week to 0.7578

Credit indices spreads were slightly higher over the week with the US Investment Grade Index (IG) finishing Friday up 0.5bps at 72.5bps, whilst the US High Yield Index (HY) moved slightly lower to finish Friday at 389.943bps. However, the numbers disguise relatively larger contractions on Friday. 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) on Friday, with UST10yr currently at 1.602% roughly flat on the week. German bunds priced 4bps tighter and UK10yr was 5bps wider.

The RBA meets tomorrow for Governor Glenn Stevens final presiding meeting before Philip Lowe takes over. None of the surveyed economists expect a change in the cash rate from 1.50%.

AUD 3 and 10yr swap rates were down 1bps each over the week and currently sit at 1.64% and 2.09%. The AU10yr bond is at 1.889%and iTraxx continued to shift lower to 98.205.

Flows

Last week saw a number holders in the Glencore 2019 4.5% fixed coupon bond emerge as sellers and take profit on the sharp rally that we’ve seen since the beginning of the year, where bonds have rallied from a yield of around 9% in to around 4%. With the bonds trading well over par, investors who initially bought the bonds as high yield investments are selling down to rebalance back into higher yielding options. Notably, we saw much of that flow going into the Adani 2020 fixed coupon bond for a yield pickup of circa 3%.

Financial and insurance floating rate Tier 2 debt saw some buying last week, though with risk continuing to rally, supply in some names is becoming harder to find. The ME Bank 2019 first call and BOQ 2021 first call were in reasonable supply with good buying, but we were unable to fill demand for the Genworth 2020 first call. While traditionally hard to get, we managed to source some of the Heritage Bank 2020 first call, which is one of the higher yielding AUD Tier 2 options, with some stock still available.

In the USD space, the IAMGOLD 6.75% 2020 attracted buying as a higher yielding gold related option. Supply was good and we saw clients switching out of Newcrest lines, for the pickup in yield while maintaining gold exposure. We also had a good institutional bid on the Bluescope 2018s which prompted some more switching, particularly as the Bluescope line approaches a possible early call date next month.

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