Monday 29 May 2017 by Leigh Winton Week in review

From the trading desk

Moody’s downgrades China and Hong Kong, and we made available several new USD DirectBonds

Economic wrap

  • US yields had a tight range last week, with 10 year Treasuries closing at 2.25%. There are holidays in the US and UK today as the markets digest Trump returning from his first overseas trip as President, and North Korea doing another missile test. The Fed is still expected to raise rates at its June meeting, and then at least once more in 2017
  • It’s a big week for US data with spending and construction data announced, as well as non farm payroll this Friday. Estimates for non farm payroll are 185k jobs and a 4.4% unemployment rate
  • OPEC extended its production cuts until 1Q18, causing oil to hold above USD50 for the WTI benchmark contract. However, commodities were mixed with copper, aluminium and iron ore all falling. The iron ore curve is in backwardation – meaning that prices in the future are predicted to be lower than today, a negative outcome for Australian government revenues

Other news:

  • The Australian consumer sector showed more signs of weakness last week as retail sales fell for the second month in a row, leading ANZ to predict GDP growth at just 0.1% for 1Q17. Given the strength of mining exports, a GDP figure at that level suggests the domestic economy has slowed sharply. New car sales were also materially lower due to government, business and consumer drops in orders
  • With wage figures, again at record lows, the RBA must decide whether to lower interest rates and potentially fuel housing price growth again, or leave rates on hold and hope that consumer and employment demand rises. The argument for lower rates will get louder the longer poor consumer figures continue
  • The G7 summit in Sicily ended with agreement on fighting protectionism, but with the USA refusing to endorse a global climate change accord. Germany’s Chancellor Merkel noted the climate discussion was difficult, and that after meeting Trump that Europe must “take our fate into our own hands”

Bond news

China and Hong Kong were recently downgraded by Moody’s, with Hong Kong financial secretary Paul Chan blogging this was based on shallow evidence. As we saw with the S&P Australian downgrades last week, this should lead to wider credit spreads that ishigher yields. We note there still seems to be large amounts of cash available to participate in new deals.

Liberty Financial closed its three year AUD senior unsecured transaction last week, raising a total of $200 million. The deal was upsized from $100 million, with pricing being slightly wider than expected due to the S&P downgrades.

Aurizon is sounding out investors for an AUD bond issue during June. The investment grade issuer operates a rail network in Queensland, was previously called QR National and was formerly owned by the Queensland government.

We released new USD bonds last week in Energy Transfer Equity, Louisiana-Pacific, Norbord Inc, Petrobras, Rose Rock and Sprint Corporation. The maturities on these range from 2022 to 2027 – if you are interested please speak to your dealer to see which best fits your portfolio. The industry sectors of these bonds vary from energy and construction, through to manufacturing, oil and communications. We believe adding these bonds allows for greater diversification by broadening the number of bonds and industries for your USD investments.

Flows

AUD

  • Last week S&P downgraded 23 Australian Financial institutions by one notch. On the back of this downgrade, the ME Bank subordinated 2019 callable bond  moved to non investment grade.  We had clients selling this position and purchasing the new investment grade Liberty fixed rate issue, allowing them to maintain an investment grade portfolio allocation
  • The recently issued Asciano fixed and floating rate 2027 bonds remained in demand for the second week of trading. The floating rate bond was a smaller issue, and as a result there is less supply – which at time of writing has already become scarce. The price has rallied on the lack of supply by 50 cents over the week. The fixed rate bond is available in better supply, at an indicative yield to maturity of 4.60% 
  • As the investment grade portfolio allocation theme continues, the Hyundai Capital Services March 2022 bond, AusNet Services August 2027 and GPT November 2026 callable bonds were purchased last week.  All three are highly rated and available in reasonably good supply, at indicative yields ranging from 3.00% to 3.80%

Non AUD

  • The Frontier switch to the 2025 callable bond from the shorter dated 2023 continued from the prior week. Clients who made this switch have enjoyed a 1% pickup in yield, while retaining exposure to Frontier
  • Last week we saw a lot of outright selling of the TransAlta 2040 bond, as the price rallied more than $6 over the past two months. This equated to a yield movement from 7.05% to 6.54% – clients have been holding this cash in search of shorter dated bonds over the coming weeks.
  • The call date for FMGAU April 2022 bond has been announced for 16 June, with clients looking to exit that position and move into the Transocean 2023 bond. This switch gives the client a pickup in yield of about 1.40%, while moving further along the tenor curve
  • We made several new US dollar bonds available over the last week. Clients who had been holding USD from recent redemptions have looked to invest in some of these new additions – in particular the Transocean 2023, Petrobras 2023 and Louisiana-Pacific 2024

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