Tuesday 04 October 2016 by Casper Wolski Week in review

From the trading Desk

Clinton wins the first presidential debate, British PM Theresa May confirms dates for Brexit and new issuance in both AUD and USD

Economic Wrap

Last week saw the first of three debates between the US presidential candidates. The majority of mainstream polling called it for Clinton, and indicators like the Mexican Peso showed a similar sentiment in markets. FiveThirtyEight’s 2016 Election Forecast has Clinton at a 70.8% chance of winning the election on 8 November in their polls only model. Uncertainty around this election will continue to factor heavily in markets over the next month.

British Prime Minister, Theresa May firmed up dates for Brexit, indicating that formal negotiations will begin before May 2017. From the time that Article 50 is triggered, Britain has two years to leave the EU. Analysts are concerned that the UK is heading for a ‘hard Brexit’, which would limit access to the European single market.

Deutsche Bank shares are up and down like a yoyo as expectations for fines from the US Department of Justice over mis selling of RMBS, prior to the GFC, circulate. Investors remain cautious on the bank and their contingent convertibles (CoCos) are making a great case study on what the prices of bank hybrids look like under stress. They were last priced at a 30% discount to face value.

At time of writing, the AUD is sitting at 0.7685, stronger again on the week.

US government bond yields were higher over the week, with the ten year bond at 1.622% as a result of improving manufacturing numbers. The Institute of Supply Management (ISM) index beat expectations, coming through at 51.5 versus expectations of 50.3, up from 49.4 for the prior period. Japanese ten year bonds are trading at negative 0.0725%, ten year German bunds are trading at negative 0.096%, and UK ten year bonds (gilts) sit at 0.732%.

Other news:

  • Stocks were mixed on Monday. In Europe, the Eurostoxx closed 0.12% lower and the FTSE 100 was up 1.22%. In the US, the Dow Jones and S&P500 were down 0.30% and 0.33% respectively
  • Putin has withdrawn from a nuclear security agreement, with the US citing a “radically changed environment”
  • Philippines’ President Rodrigo Duterte announced that US troops will perform military exercises for the last time – signalling the end to a pact that has run since post WW2 – in a move aimed to strengthen the nation’s relationship with China
  • The Western Bulldogs and Cronulla Sharks won their respective Grand Finals – this is unlikely to affect markets, contrary to expectations in The Shire and Footscray

Credit indices spreads were mixed over the week, with the US Investment Grade Index (IG) at 75.232, down almost 4bps on the week. The US High Yield Index (HY) was 4bps wider, currently at 402.754.

Domestically, the ten year Australian Government bond is at 2.105%, 13bps higher over the week. Australian iTraxx is at 102.917bps, 1bps lower for the week.

Flows

Last week two bonds were added to our USD DirectBond suite – the Navient 7.25% 2023 and 5.625% 2033 fixed coupon bonds. Navient Corporation manages education loans in the US, having previously been split off from Sallie Mae. The BB- senior unsecured lines are available in minimum parcels of USD10,000 and have a yield to worst/maturity* in the high 6% and low 7% area for the 2023 and 2033 respectively.

In the AUD space, we launched a transaction for StockCo, an agricultural lender that provides short term ‘finishing’ finance of cattle and sheep. The company sought to raise A$30m through a six year fixed coupon bond, paying a 8.75% monthly coupon, which steps up to 9.50% if the bond is not called in 2021.

In further new issuance, Qantas returned to the domestic market last week and issued new seven and ten year fixed lines. These were well received and led to a rally in their existing 2020, 2021 and 2022 lines, which are now yielding around 4%. As a result, we saw some clients take advantage of the price action and switch into higher yielding alternatives.

FiveThirtyEight’s 2016 election forecast can be viewed here.External link - opens in a new window

*In this instance, yield to worst and yield to maturity are the same. The yield to worst (YTW) is the lowest yield an investor can expect when investing in a callable bond.