Tuesday 11 October 2016 by Leigh Winton Week in review

From the trading Desk

US payrolls rise, but fall short of expectations, Sterling crashes, the RBA leaves rates on hold and investors add Suncorp subsidiary, AAI to their portfolios

Economic Wrap

Overseas News:

  • Key US employment measure non farm payrolls rose by 156,000 but fell short of expectations of 170,000 new jobs. Headline unemployment printed at 5.0%, higher than forecast of 4.9%.
  • GBP/USD spot experienced a ‘flash crash’ on Friday that is being pegged variously on comments by French President Hollande’s demands around Brexit, algorithmic traders, and computer system generated stop losses. Sterling has not been weaker since the mid-‘80s.
  • Stocks were largely lower on Friday. In Europe, the Eurostoxx was down 0.70% while the FTSE rallied 0.63%. In the US, the Dow Jones and S&P500 fell by 0.15% and 0.33% respectively.
  • Gold continues a shocking run and currently sits at USD1259 /ounce

US benchmark 10 year bonds were 9bps wider (higher yields) for the week with a slight pullback (in yield) on Friday resulting from the weaker employment measures. A December US Federal Open Markets Committee hike has a 66% expectation. UK 10 year gilts were also notable, wider to 0.97% in a huge 20bps move over the week.

Credit indices spreads tightened over the week with the US Investment Grade Index (IG) closing Friday at 74.349bps. US High Yield Index (HY) sits at 401.790bps. 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.

Domestically, the 10 year Australian government bond sits at 2.177%, 10bps wider for the week. Australian ITraxx is at a 103.15bps (or 1.03% for this index of Australian Investment Grade names), which is close to flat for the week. The RBA left the cash rate unchanged last Tuesday at 1.50%.

The parliamentary hearing, questioning the CEOs of CBA, Westpac, NAB, and ANZ went ahead last week which made for repetitive watching. It remains to be seen what the product, if any, of this hearing will be but the co-operation of the CEOs was evident with Labour continuing to demand a royal commission.

The AUD is trading at 0.7600 US cents today, and 0.6111 pence.

Flows

Last week we added the Suncorp Group subsidiary, AAI Limited subordinated bond to our DirectBond list. AAI issued the floating rate note with a first call in 2022 and final legal maturity in 2042. The bonds are currently in good supply and indicatively offered at a projected yield to call/worst in the mid 4% area. A fact sheet with further details on the bond can be accessed here.External link - opens in a new window

The new AAI subordinated line received a strong response, so it was unsurprising to see clients switching out of other subordinated lines to make way for the AAI. Selling was predominantly out of shorter dated subordinated lines, such as the ANZ subordinated line callable in 2019. The old style NAB Cap Tier 1 was also called last week, so some flow was also reinvestment driven.

Inflation trading picked up again last week. We saw a number of sellers of the AGN 2025 inflation linked bond come through in response to some larger institutional buying. Most AGN selling wasn’t reinvested in inflation protection. However, we have started to see better buying emerge in the Sydney Airport 2020 and 2030 inflation linked bonds. We are now seeing more investors prepared to take a longer term view on inflation, or that want to hedge against it.