Monday 15 May 2017 by Leigh Winton Week in review

From the trading desk

Demand for smaller regional bank bonds increases following the introduction of the major bank levy in the Australian federal budget 

Economic Wrap

  • US inflation and retail data were weaker than market expectations, triggering a rally in US Treasuries, as yields moved lower
  • US consumer sentiment climbed to 97.7, up from April and significantly up on the same time last year, despite ongoing pessimism amongst Democrat voters
  • Germany released 1Q GDP figures for 2017, rising 0.6% on the back of higher business investment in construction and very strong exports 
  • UK’s central bank governor warned of a squeeze on consumer spending as inflation rises but wages fall. The Bank of England is in a similar bind to the RBA in that the British economy faces growing risks of weakness and potentially stagflation but there remains pressure to increase rates from record lows
  • Closer to home, the New Zealand dollar fell sharply after the RBNZ left rates on hold (market was expecting an increase) and housing sales fell 31% since the same time in 2016, and more than any time since 2010

Looking at the bigger picture:

  • Australian financial press has been dominated with discussion of the Federal Government’s proposed levy on the Big 5 banks and the boost in the Medicare levy. The budget’s impact is likely to be that of a quasi tightening, as higher passed through mortgage rates and 0.5% higher tax will hit consumers’ wallets 
  • China added some data to its previously stated “One Belt, One Road” plan to increase offshore investment linking 65 countries in a massive infrastructure and trade project costing more than US$100bn. This is all part of China’s move to fill the void potentially created if the US and Europe continue to pull back from global trade pledges. This is a great boost for the global economy, with the only concern being the impact on China’s ballooning debt
  • In a global trend, the “death of retail stores” gathered momentum last week when Warren Buffett announced Berkshire Hathaway had exited retail investments altogether, declaring in their annual report, “we expect the paradigm shift taking place to dramatically alter the retail landscape, with potentially significant implications for real estate investors.” Credit Suisse estimates that 8,600 retail stores will be closed in the US this year, 32% more than during the US recession in 2008, despite consumer confidence and employment being much higher today. This is ominous for Australian retail given the largest cause of this plight in the US, Amazon, has announced plans to expand its Australian operations
  • The global cyber-attack flags a growing risk to global economic stability as our reliance upon data increases

Bond news

Moody’s announced an upgrade to Qantas’ credit rating earlier today. We continue to believe that the issuer’s bonds are expensive and any further rally in prices should be seen as a profit taking opportunity.

Today is the final opportunity for holders of Swiss Re fixed and floating lines to organise reinvestment before proceeds are repaid. The securities mature on 25 May.

zipMoney announced their first public warehouse facility. The $260m facility is funded by three notes (A, B, C) and the B Notes are available to wholesale investors with a two year scheduled maturity with price guidance of 1M BBSW + 6.00%.

Asciano Finance raised $350m for ten years across two investment grade senior bonds, well in excess of the $200m issue size. Asciano’s existing 2025 bond continues to be well bid and we expect the new bonds to see similar secondary market interest. Wholesale investors will have access to both the floating rate and fixed rate bonds via FIIG and should speak to their salesperson for indicative pricing.

Fortescue Metals Group has announced the call for the company’s April 2022 notes to occur in early June. FMG has cut net borrowings substantially to near $4bn in December 2016 from a peak of $10.7bn in 2012, according to Bloomberg. Investors should speak to their salesperson about reinvestment options, including the two new FMG senior unsecured bonds. Both bonds are fixed rate, denominated in USD, and have five and seven year terms.

Trade ideas

Primary issuance often leads to lower prices, as investors look to rotate their exposures from old to new, and the zipMoney primary appears to be no exception. The AUD high yield space is better offered currently as a result, making this an opportune time to establish new portfolios or diversify existing ones. In particular, IMF Bentham 2020 deserves attention with volume available at 6.2%. Eric Insurance, Cash Converters, Plenary BFUT, Impact Homes, and Moneytech are also available.

Qantas liquidity is currently strong and holders of the 2020, 2021, or 2022 bonds should take the opportunity to either move on to the next credit story or diversify their portfolio, depending on their strategy. Asciano’s new bonds offer an opportunity to extend term, maintain credit rating, and shift to an industry exposure with less downside risk.

Insurance Australia holders (IAL) can switch their March 2019c for the AAI October 2022c and pick up approximately 0.50% in yield to call. In addition, the coupon increases from +2.80% to +3.20% paid quarterly. AAI is the main operating general insurance company for Suncorp Group and with both bonds sharing similar ratings and classified as Tier 2 subordinated debt, we see the swap as attractive.

Residential Mortgage Backed Securities continue to offer compelling value when compared to equivalently rated corporate bonds, particularly bank and insurance sub-debt. Unlike corporate bonds, RMBS become structurally more secure over time as well as benefiting from an improving underlying exposure as the pool of mortgages pays down. Investors can tightly define the risk profile of their exposure with notes rated from AAA to B. Availability in sub investment grade RMBS has been limited, but we do have ongoing access to more highly rated tranches from transactions originated by Liberty Financial, Bank of Queensland, and Bendigo Bank. 

Non AUD

  • FMG have announced they are calling their 6.875% Apr 22 unsecured debt after launching a 1.5bn Fixed/FRN offer last week. Clients have the option of selling their unsecured prior to the call and reinvesting funds elsewhere in the USD space.
  • Talen Energy bonds bounced following their Q1 results after more than a week of steady declines. The 9.50% July 2022 bond continues to be a focus for investors hunting yield in USD.
  • Frontier Communications traded lower after posting worse than expected Q1 results but rebounded late in the week. This saw some investors take advantage of the dip, focusing mainly on the higher coupon 2025 line.

AUD

  • Demand remains strong for high rated bonds, with over $3m of the Residential Mortgage Backed Securities Liberty 2016-2 C bonds purchased in one day. These investment grade RMBS bonds offer a floating rate coupon and were the bond of choice for clients switching from the called Swiss Re bonds, which were also of investment grade. 
  • There has been pent up demand for the Sydney Airport 2030 bonds, with some clients lengthening duration and switching from the Sydney Airport 2020 bond – a strategy that is fondly referred to as the ‘Runway switch’. With strong demand, the Sydney Airport 2030 bonds have rallied in price, and are bid at a real yield to maturity of 3.50%.  
  • With the Major Bank Levy announced last week in the Federal Budget, we have seen demand for the smaller regional bank bonds as they are not subject to these new charges and positions them more competitively. In particular there was demand for the AAI (Suncorp) October 2022c bond, available at an indicative projected yield to maturity of 4.16% and also the Bendigo & Adelaide Bank December 2021c bond available at 3.94% indicative yield to  maturity.  On the back of the new tax the bonds rallied one to two basis points each. 

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