Tuesday 20 June 2017 by Leigh Winton Week in review

From the trading desk

The Federal Reserve increased rates for the second time in three months, we see increased interest in Liberty’s 2020 fixed rate bond and a shortening of duration in the USD high yield space  

What’s trading

AUD

  • Liberty’s 2020 fixed rate bond was one of the popular bonds over the week as demand for shorter dated investment grade bonds continued. Clients switched from some longer dated subordinated bonds in favour of the senior debt, taking advantage of the pickup in yield. Supply in Liberty remains good and is available to clients with an indicative yield to maturity of 4.57%
  • NEXTDC’s latest bond began trading in the secondary market last week with strong demand. Its latest bond has a 2021 maturity and offers a 6.25% coupon. Clients will need to remain patient as there is no supply at the moment
  • Other higher rated bonds that continued to be in demand over the week were the AusNet Services August 2027 fixed rate bond, GPT November 2026 callable fixed rate bond and the Hyundai Capital Services March 2022 fixed rate bond. Clients enjoyed the diversified offering of these bonds in their portfolios. The GPT 2026 bond is available at an indicative yield to call of 3.81%

Non AUD

  • High yield remained the focus in non AUD flow last week, with the majority of trades occurring in Rackspace and Transocean. Shorter duration appeared to be the driver as many clients chose to reduce exposure in TransAlta’s 2040 bond in favour of shorter dated Rackspace 2022 and Transocean 2023 bonds
  • Investor interest returned to the Frontier Communications’ 2025 maturity after a tough few weeks for the security. A 1Q17 loss and poor performance of their newly allocated term loan B helped push the yield of the 2025 maturity north of 12%. This attracted yield hunters with some switching out of NCIG’s 2027 bond, selling into a strong street bid

Economic wrap

  • The Fed increased rates last week by 0.25%, and lowered their forecast CPI for 2017. Further, they increased their assumed GDP Growth forecast for 2017 from 2.1% to 2.2%pa, and lowered their unemployment rate forecast
  • Friday’s US data continued to be weak, with housing starts and consumer sentiment both weaker than expected. This is pushing out further rate hike expectations towards December, although the unwind of the Fed’s balance sheet may begin from September
  • US Headline CPI fell 0.1% in May, and core CPI – excluding food and energy – rose by just 0.1% compared to 0.2% expected by the market. Over the last 12 months core CPI has risen by 1.7%, higher than the average over the last ten years of 1.5%, but still well below the Fed’s target 2.0%

Other news

Australian jobs growth in May provided good news for the domestic economy. If jobs growth is maintained into June and July, a rate cut is off the table in 2017. ANZ’s job ads series showed below average, but still positive growth in May at 0.4%, compared to its long term average of 0.6%.

The Australian economy has a lot of room to expand without wage growth pressures, relative to the US economy. Underemployment, referred to as U6 unemployment in the US and underutilisation in Australia, shows a stark contrast between the two economies. We believe there is scope for economic improvements in Australia should the right stimulus come along, while the US can really only maintain moderate economic growth from here.

In other US news, the balance between economic hits and misses has shifted in favour of misses. The Citigroup US Economic Surprise Index, which measures whether various economic data releases surprised the average economist one way or the other, fell into negative territory for the first time since the US election last year. Some of the data can be explained by seasonal factors, but the concerning figures are the confidence data. We may be seeing the answer to the question of how long the US consumer and business sector can remain confident despite Trump’s rising challenges. More data is needed to confirm, but the risks for the US economy are rising.

 

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