Tuesday 06 June 2017 by Leigh Winton Week in review

From the trading desk

Liberty Financial’s 2020 bond started trading in the secondary market and Italy to bailout its oldest surviving bank, with senior bondholders bearing most of the losses

What’s trading

AUD

  • The newly issued Liberty 2020 senior unsecured bond began trading in the secondary market late last week, seeing strong demand. The investment grade bond was used to rebalance portfolios, moving out of unrated bonds and lower yielding investment grade names – such as Sydney Airport’s 2020 inflation linked bonds. It also appeals to clients as it has a shorter tenor. The fixed rate bond is available at an indicative yield to maturity of 4.50%
  • The FIIG originated CML 2021 call fixed rate bond became available to retail investors, giving holders an opportunity to switch out of their existing bonds and pick up in yield. One of the more popular switches was from Qantas 2022 to CML. We note supply in CML is currently hard to source, and is available at an indicative yield to 2021 call of 6.00%
  • There has been renewed demand for inflation linked bonds with the RBA expecting inflation to be back within its target range of 2-3% by 2018.  Inflation linked bonds are typically highly rated, which is appealing for portfolios. Of note are Australian Gas Networks’ bonds, where we’ve seen strong ongoing demand and a rally in price. There is an improved bid for any clients wishing to sell this bond and look at other options

Non AUD

  • In the USD space last week, we saw clients switching into the Transocean 2023 bond from well known names such as Fortescue Metals Group, Genworth and Kindred.. The Fortescue April 2022 bond is being called this month with its last trading day on the 7 June. As a result investors have been looking to sell prior to the call date and pickup 1.40% in yield.
  • Holders of the Kindred 2023 bond have taken profits after it rallied in price from 93.85 in February to 106.55 currently – a fall in yield of almost 3%. Investors who purchased the bond in February have made an annualised return of just over 50%
  • NCIG has seen some solid two way flow this week, with the bond offering attractive yield of 9.617%

Economic wrap

  • US official employment data came in well under expectations, at odds with the ADP private sector data out just two days prior. The retail sector has suffered a lfundamental shift, losing 80,000 jobs in the past four months. The shift from in store to online retailing is accelerating, estimated to cause another 500,000 job losses in the next 12 months. This would slow the pace of interest rate rises by the Fed
  • The Italian government has formally proposed a bailout of Banca Monte dei Paschi di Siena. Extraordinarily, the proposal involves senior bondholders bearing most of the losses with hybrid investors being compensated, a move that shows that the bailout is entirely politically motivated. Approved or not, it will be a major test for the credibility of the EU’s new banking regulations and the EU itself
  • The UK election this week should see the Conservatives re-elected and this weekend’s shocking terrorist event may well play into the incumbent party’s hands. However, the size of the government’s majority may not be as large as expected weeks ago. Currently, the Tories hold 330 of the 650 seats 

Other news

  • US unemployment data was weak, resulting in treasury bonds rallying further. The 10 year US treasury bond closed at 2.16%, its lowest level in 2017
  • Oil fell again, with concerns OPEC production cuts may not hold. July WTI closed below $48 per barrel
  • Iron ore also fell, closing below $57 per tonne
  • The Fed’s Beige Book release showed modest economic growth and softening consumer spending 

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