Monday 12 September 2016 by Casper Wolski Week in review

From the trading Desk

US rate hike expectations rise, bonds weaker across markets and coal prices continue to recover

Economic Wrap

The European Central Bank (ECB) decided to shake things up and undershot market expectations for extra stimulus, and asset purchases with no new stimulus. Further, the Bank of Japan (BoJ) is undergoing a policy review ahead of its September meeting, which has caused unrest among global markets.

Boston Fed President Eric Rosengren said that the case was stronger for the FOMC to raise rates, which firmed September rate hike expectations to 30% up from 18%.

Overseas news:

  • Global equities tumbled on Friday, with major US markets the Dow, NASDAQ, and S&P500 falling by 2 to 2.5% each. European equities also weakened with the Dax, STOX600, and FTSE down approximately 1% a piece
  • North Korea tested its fifth nuclear weapon, which was its most powerful to date at 10 kilotons
  • AUD:USD exchange rate has declined almost 2 cents since Thursday and sits at 75.43US cents. The USD was stronger against major currencies, likely due to interest rate expectations
  • Coal continues a remarkable recovery up 105% calendar year to date

Credit indices spreads were flat over the week but moved sharply on Friday – the US Investment Grade Index (IG) closed Friday at 76.072bps, up 3.5bps. The US High Yield Index (HY) moved similarly, up to 407.359bps. 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.

Benchmark bonds were largely weaker across the board. US Treasuries fell in price on Friday resulting in higher yields, with UST10 year currently at 1.67% through a dramatic range of 15bps. The German 10 year bund moved into positive territory for the first time since July, and UK 10 year was a whopping 15bps higher. Unsurprisingly, AUD bonds moved similarly – the AUD 10 year government bond is at 2.052%, 16bps wider for the week, and iTraxx ground in slightly to 97.645. AUD 3 and 10 year swap rates sit at 1.71% and 2.23% respectively, sharply steeper on the prior week:


Source: Bloomberg

Investors should look out for Tuesday’s Chinese data – retail sales, fixed asset investment, and industrial output which are all liable to drive price shifts across asset classes.

Flows

The USD space saw the majority of flow last week, with interest coming through on recent DirectBonds. The TransAlta 2022 and 2040 fixed coupon bonds saw good buying, with about USD5m transacted over the week. That buying favoured the longer dated 2040 line, with yields in the high 6% area compared to shorter 2022 line, yielding in the low 4% range.

Late last week we also launched three more USD DirectBonds issued by Dell. The three senior unsecured fixed coupon bonds range in maturities, with a 2021External link - opens in a new window, 2028External link - opens in a new window and a longer dated 2038External link - opens in a new window. The sub investment grade offerings are available with indicative yields in the low 3% area for the shorter line, and in the low to mid 6% area for longer dated options.

In the AUD space we continued to see sellers emerge in what were previously considered high yield options; Glencore and Qantas. With improving credit stories and the subsequent contraction in yields, clients are rebalancing exposures back into high yield options in both AUD and USD. Interestingly, Qantas is also looking at a new AUD transaction, which may potentially allow clients wanting to retain company exposure to move out along the yield curve.