Monday 19 September 2016 by Leigh Winton Week in review

From the trading Desk

All eyes on the RBA as Philip Lowe becomes governor, both The Fed and BoJ have meetings this week and we see buying in the new Dell Technologies Group DirectBonds

Economic Wrap

The FOMC meet this week with no change in rates expected. Markets are pricing a 12 to 14% chance of a rate hike this week and a 50% chance of a hike by the end of 2016. The post meeting announcement will be watched closely for wording relating to a possible hike in 2016.

The Bank of Japan (BoJ) meets Wednesday, with expectations they will inject more money into the monetary system to try and push up inflation. Results of the BoJ’s review are also due out.

The AUD is trading at 0.7505 today, higher than Friday, when USD strength (AUD weakness) occurred after US CPI data.     

US government bonds are higher in yield over the week, with the 10 year bond currently at 1.69%. Other major economy government yields are higher too, with current 10 year Japanese government bonds trading at a negative 0.04% yield, 10 year German bunds trading at a positive 0.01% and 10 year UK government bonds (gilts) trading at 0.87%.

Other news:

  • Stocks closed lower on Friday. In Europe, the Eurostoxx was down 1.30% and the FTSE 100 down 0.3%. In the US, the Dow Jones and S&P500 were down 0.49% and 0.38% respectively
  • US economic data was mixed, with CPI slightly beating expectations at 0.3% for the core number and the Michigan consumer sentiment index weaker at 89.8% compared to expectations of above 90%
  • The Bank of International Settlements has warned that China faces mounting risks of a banking crisis, and as such markets are divided on whether a hard or soft economic landing will prevail
  • A rumour that UK Prime Minister Theresa May wants to invoke Article 50 (to leave the EU) in early 2017, pushed down the Pound against major currencies
  • The Organisation of Petroleum Exporting Countries (OPEC) plans to hold an informal meeting with Russia at the end of September, with speculators concerned that an oil production output cap may be agreed

Credit indices spreads are largely unchanged over the last week, with the US Investment Grade Index (IG) finishing Friday up 1.3bps at 76bps, while the US High Yield Index (HY) widened 4.5bps to finish Friday at 410bps.

Domestically, 10 year Australian government bonds last traded at 2.1225%, 8bps higher on the week, while the Australian iTraxx is 1bps lower on the week at 99.00bps.

Philip Lowe becomes the RBA governor today with markets anticipating his comments on the RBA’s adherence to the 2.00% to 3.00% inflation target, and the usefulness of rate cuts (monetary policy) versus taxation (fiscal policy) for stimulus purposes.

Flows

Last week we added two more Dell DirectBonds to the menu, taking the total available to five. The new bonds are issued under Diamond Finance Corporation, a financing vehicle controlled by the Dell parent. The new DirectBonds include a 2026 and a 2036 fixed coupon USD bond, with an indicative yield to worst* of 4.72% and 6.46% respectively. Both are senior secured and rated investment grade, as opposed to the senior unsecured sub investment grade lines issued out of Dell. See below for links to other Dell bonds and the Factsheets.

Unsurprisingly, flow in USD bonds was good in the new Dell (including Diamond Finance Corporation) suite. Investors favoured the Dell 2028 senior unsecured line, which is currently offered in the low 6% per annum area. We saw a number of switches into the new bonds – many were from resource related credits, such as BHP, with clients clearly looking to take profit on the sector and move into a less volatile industry, albeit lower overall ratings for the Dell bonds which we have DirectBonded and range from BBB- to BB-

In AUD denominated trading, we sourced the Genworth floating rate subordinated line with a 2020 first call date to satisfy some pent up demand after having difficulty for some time. Similarly, we traded some Alumina 2019 fixed rate bonds for clients looking for other higher yielding senior investment grade options aside from Adani Abbott Point.

A summary of all our available Dell Technologies Group lines can be accessed here,External link - opens in a new window including more detailed factsheets on each bond.