Monday 14 November 2016 by Jessica Rusit Week in review

From the trading desk

Markets are adjusting post Trump’s win as White House roles start to be filled

Economic Wrap

Reince Priebus has been announced as Trump’s chief of staff and Stephen Bannon as chief strategist.       

The theme – following the surprise Trump win – is one of a stronger USD, higher US yields, and a view that spending by the Trump administration will lead to higher inflation, which will be good for corporate profits and stocks.

The AUD is trading lower today at 0.7545, with USD strengthening post Trump’s win.    

US government bonds are much higher in yield over the week, with the 10 year currently at 2.185%. Other major economy government yields are higher too. Current 10 year Japanese government bonds are trading at a negative 0.02% yield, 10 year German bunds are trading at positive 0.31% and 10 year UK government bonds (gilts) are trading at 1.365%.

Other news:

  • Stocks were mixed on Friday. In Europe, the Eurostoxx was down 0.54% and the FTSE 100 was down 1.43%. In the US, the Dow Jones was up 0.21% however the S&P500 was down 0.14%
  • US consumer sentiment was stronger than expected, rising to 91.6 versus expectations of 87.5
  • Oil fell 2.5% on Friday with output from OPEC producers at record levels. The Nymex WTI contract closed at 43.50 dollars.  Other commodities were generally strong over the week, with iron ore the stand out performer up 15 dollars at almost 80 dollars per ton
  • Britain’s UK independence party (UKIP) leader Nigel Farage said there is a real opportunity for improved UK trade with the US, but that UK politicians must apologise to Trump after criticising him
  • China’s fixed asset investment grew 8.3% in line with expectations, whereas retail sales and industrial output disappointed, at 10.0% and 6.1% respectively

Credit indices spreads are lower over the last week with the US investment grade Index (IG) finishing Friday down 5.5 basis points (bps) at 75.5 bps, whilst the US high yield Index (HY) narrowed 16.5 bps on the week to finish Friday at 417 bps. The VIX is substantially lower which typically occurs once event risk has been removed. The VIX is an index reflecting volatility, traded on the Chicago Board Options Exchange (CBOE) and has had its largest fall in five years (-23%) after announcement of the new president.

Domestically, the 10 year Australian government bonds last traded at 2.647%, 30 bps higher on the week. The Australian iTraxx is at 113.75 bps (or 1.1375% for this index of 25 Australian Investment Grade names), up 8 bps over the week.

Australian unemployment is due Thursday, with the headline rate expected at 5.7% versus 5.6% previously, according to Bloomberg.

The higher yields on government bonds will lead to more evenly balanced portfolios split across fixed rate, floating rate and inflation linked bonds. Importantly, the vast majority of the fixed rate bonds the Portfolio Strategies team suggest  are shorter dated, being five years or less, and consequently are less exposed to duration risk.

Flows

Last week Tier 2 bonds continued to be popular, with supply in the Genworth 2020 callable and Suncorp subsidiary AAI 2022 callable floating rate bonds remaining.  As the US election neared over the week, clients diversified their portfolios in preparation for the unknown and sold unrated fixed rate bonds in favour of adding the above two investment grade floating rate bonds. Supply remains available in both and at an indicative yield to call of 5.15%* and 4.76%* respectively.

The Genworth September 2021 USD DirectBond has been well received in its first week of trading, since being added to our DirectBonds list the week prior. With the BlueScope 2018 fixed rate bond early call on 21 November 2016, investors used proceeds to purchase the Genworth 2021 bond and remained in USD, moving further along the tenor curve. The bond is offered indicatively at 8.71%* yield to maturity.

Post Donald Trump’s presidential win, the Geo Group April 2023 USD bond rallied hard, moving $8 higher in price.  This was on the back of Trump’s detention policies, where he has called for increased deportation of undocumented immigrants, requiring increased use of prisons to implement. Supply in the bond has now dried up even at the much higher price – no doubt investors who had purchased the bond prior are very happy with their decision!

*Prices accurate as at 14 November 2016 but subject to change.

Get your free copy of The Benefits of Corporate Bonds eBook

Get a copy of The Benefits of Corporate Bonds eBook

Subscribe to The WIRE newsletter

Sign up to a free weekly newsletter to get the latest investment news.