Monday 13 February 2017 by Casper Wolski Week in review

From the trading desk

Trump announces a tax plan to be presented over the coming weeks and we add Kindred Healthcare to our USD DirectBond list

Economic Wrap

Metals are the order of the day with iron ore futures breaking through USD100/t on Friday, following very strong Chinese trade data on Friday afternoon AEDT. Both imports and exports are far exceeding expectations, growing by 16.7% and 7.9% respectively. This has had a positive impact on other base metals with futures prices rallying almost across the board.

Trump has announced via Twitter that a “phenomenal” tax plan will be presented over the coming weeks. US equity markets and the US dollar pushed higher although no detail has been provided and it remains to be seen what time frame a Trump stimulus might play out over. The Trump administration has made little mention of the two empty seats on the Federal Open Markets Committee (FOMC) and now has a third to consider – Daniel Tarullo was due to complete his term in 2022. Tarullo has been a strong proponent of the Dodd-Frank legislation and his resignation comes at a time when Trump appointees point towards a looser regulatory environment for banks. At full strength, the FOMC has seven members.

Other news:

  • Global equities were stronger over the week. US indices S&P500 and NASDAQ rose by 0.81% and 1.19% respectively. In Europe, the FTSE100 closed up 0.98% for the week on Friday while the EuroStoxx50, CAC, and DAX were broadly flat. Our own ASX200 was much stronger, rising by 2.27% over the week
  • OPEC will release their monthly report shortly, following output cuts last week and 90% compliance with cartel agreements according to the energy information administration. Oil is stronger with West Texas Intermediate at $54, off a low of almost $51
  • Credit indices spreads are slightly higher over the week with the US Investment Grade Index finishing Friday at 64.5 bps. The Bloomberg Barclays US Corporate High Yield index moved through 1850, up 2.5 bps over the week
  • FOMC Chair Janet Yellen will give her testimony to the senate later this week. It will be interesting to see whether uncertainty surrounding Trump’s secret plan to reform corporate taxes delays willingness to increase the Fed funds rate immediately. According to futures markets, the probability of a hike at the next meeting in March sits at 28%

US government 10 year benchmark bonds were 4 bps lower in yield over the week at 2.42%, however this small move disguises a 14 bps range with yields reaching almost 2.32% midweek. Japanese, German, and UK 10 year bonds sit at 0.09%, 0.32%, and 1.26% respectively. European bonds moved significantly over the week with aforementioned German and British 10 years tightening 10 bps and 13 bps.

Domestically, Australian 10 year government bonds sit at time of writing at 2.72%, almost 8 bps lower on the week. Australian ITraxx is at 89.7 bps (or 0.897% for this index of 25 Australian Investment Grade names), 2 bps lower over the week. The Aussie dollar is trading at 76.64 US cents, roughly unchanged over the week; versus the Pound, the dollar is also flat.

We continue to recommend new portfolios which have an equal split of fixed, floating rate and inflation linked bonds.  We will look to realign existing portfolios towards this mix as reinvestment opportunities occur either from additional capital or maturing bonds.

Flows

We had a new addition to the DirectBond offering last week in the form of Kindred, a US healthcare services provider specialising in post acute care services. The company has operated in four areas: long term acute care hospitals, home services and hospice facilities, and rehabilitation services and nursing centres – however Kindred recently announced its intention to exit nursing centres. The company has a USD fixed coupon bond maturing in 2023, made available to DirectBond clients in USD10,000 parcels with USD1,000 increments. With good supply and a yield to maturity of over 10%, the new addition was positively received. More information on the issuer and bond is available here.External link - opens in a new window

The high yield issue from Queensland home builder, Impact Group, became available to retail clients today after seasoning one year from issue. We expect buying interest from retail-classified investors given the new name, however with the additional liquidity we often see wholesale clients realise the opportunity to sell and look at other options in the high yield space. We have published an updated research report on Impact here.External link - opens in a new window

On that theme, we saw clients selling out of high yield paper to look at other USD options, such as the recently added Talen and Kindred bonds. The selling arose mostly from FIIG originated deals that had seen some price performance. One exception was the Virgin 2019 USD bond, which had seen a very strong institutional bid out of Asia, with the bond rallying around 50 bps over the week. Clients were quick to take advantage of higher prices and looked to reinvest in our other high yield USD offerings.

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