Monday 22 May 2017 by Leigh Winton Week in review

From the trading desk

S&P downgrades 23 Australian financial institutions as a result of domestic property price rises, and we have two new DirectBonds from Asciano Finance

Economic wrap

  • US yields closed near recent lows with 10 year Treasuries at 2.25%. This came on the back of a politics led sell off in risk assets during the week
  • Oil closed up 5% last week with the June WTI contract closing above US$50.00.  OPEC meets 25 May to discuss extending production limiting measures
  • Japan’s April exports were up 7.5% and their declining trade surplus was JPY482bn. Japanese exports have been strong for the past few periods, improving our expectations for the country and Asia more generally

Other news:

  • Wages and unemployment data out last week confirmed Australia’s ongoing problem with underemployment. Wage growth remained at a record low of 1.9%pa, or 1.7%pa when looking at just the private sector. Unemployment fell to 5.7%, but this hides ongoing weakness in labour demand with total hours worked falling back to the same level as November 2015
  • On a brighter note, Australia’s sovereign credit rating was affirmed at AAA by the ratings agencies
  • Brazil’s President Michael Temer has been accused of corruption by the Prosecutor General, Rodrigo Janot. This caused a large sell off in Brazilian markets which will likely spill into related emerging markets. The AUD is a proxy for many EM trades, so we are interested to see how this plays out
  • Brexit Secretary David Davis said UK will leave EU exit talks unless EU bloc drops demands for up to EUR100bn payment
  • A spate of data out of China showed a slowdown from the first quarter of the year. This was expected as the Chinese government attempted to curb the growth in corporate debt

Bond news

S&P announced this morningExternal link - opens in a new window that 23 Australian financial institutions have been downgraded as a result of the ramp up in domestic property prices. They consider this increases the likelihood of a fall. It also highlights why we prefer issues with step up coupons, and there will certainly be value opportunities if any subordinated debt crosses over into sub investment grade.

Liberty Financial is issuing a three year senior unsecured transaction early this week. Clients should be familiar with Liberty as one of our preferred originators of RMBS transactions. We expect the issue to be compelling – both as a source of additional diversity, but particularly when compared against other short dated fixed rate bonds from the likes of Qantas, Glencore, and Dampier to Bunbury Natural Gas Pipeline. RMBS is available to wholesale investors only.

The zipMoney primary transaction is expected to settle this Thursday for a total of $260m across class A, B, and C notes. The class B notes will be issued with a monthly coupon of +6.00% for an expected two year term.

Asciano Finance’s two investment grade senior bonds are both now available, although the floating rate noteExternal link - opens in a new window has proved harder to source. The bulk of the $350m issue size is in the fixed rate bondExternal link - opens in a new window, which remains readily available.

Six new USD bonds will be made available by us this week, helping make a greater diversity of securities available. Clients should speak to their salesperson to see which best fits with their portfolio.

Flows

AUD

  • Asciano, Australia’s largest national rail freight operator, issued two new bonds which were added to the DirectBonds list and began trading in the secondary market last week. There was strong demand for these bonds, with clients having the option of either the fixed 2027 or floating rate 2027 tranche. Many clients switched from the Qantas bonds, taking profits as they have rallied significantly and moved in to either of the Asciano bonds, maintaining an investment grade exposure in their portfolio
  • We launched and closed a new issue last week for zipMoney, which saw clients switching out of existing high yielding bonds – freeing up stock for unsatisfied demand where it had been tightly held. Clients were again able to purchase the Dicker Data 2020 bond at an indicative yield to maturity of 5.28%, and the Ansett Aviation 2020 at an indicative yield to maturity of 6.26%. At time of writing, Dicker Data supply has dried up again
  • Another bond to become available was the Plenary 2021, which we originated in June 2014.  The issuer is the borrowing vehicle of Plenary Group, set up to fund the company’s stage in eight different infrastructure projects. The newly found supply was quickly snapped up by clients at an indicative yield to maturity of 5.43%.  The bond is due to start amortising next year, giving clients some principal back along the way

Non AUD

  • The Talen switch continued for another week as clients shortened duration and moved from the 2025 bond to the 2022 bond. The levels had moved lower in price the week prior, making it an even more attractive strategy, but have since recovered. The 2022 bond has rallied with an indicative yield of 10.8% on the Friday close
  • Clients were taking profit on NCIG and switching into other USD bonds, in particular the Frontier 2025 call for a yield of 11.75%. This allowed clients to maintain exposure in the USD bond market and a pickup in yield
  • We also saw a selloff of the TransAlta 2040 bond, as clients freed up capital to fund the new zipMoney issue while shortening duration in their portfolio
  • There is some interest in a switch to the Frontier 2025 callable bond from the shorter dated Frontier 2023, with the 2025 bond giving a yield pickup of about 1% while moving further along the tenor curve

 

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.