Tuesday 04 July 2017 by Leigh Winton Week in review

From the trading desk

Liberty Financial's 2020 bond cheaper as yields moved higher, we added Ensco’s 2025 bond to the DirectBond list and the Australian housing sector receives more warnings 

What’s trading

AUD

  • Last week, Liberty’s 2020 fixed rate bond became cheaper as bond yields moved higher, making it an even more attractive offering. Clients took advantage of its improved price, switching out of other holdings with a lower credit rating. A popular switch was from Tier 2 bonds, moving further up the capital structure to senior debt, where the Liberty bond sits. Liberty is available at an indicative yield to maturity of 4.72%
  • Aurizon’s new 2024 fixed rate DirectBond was met with strong interest last week. Aurizon manages and operates a coal export rail network in Australia, comprising of four major coal systems. The bond has been added to portfolios as a more defensive allocation due to its investment grade rating, senior debt and core underlying business, and is available at an indicative yield to maturity of 3.88%

Non AUD

  • In the USD space, we added Ensco’s 2025 fixed rate bond to the DirectBond list – which was well received in its first week.  Ensco is a leading provider of offshore contract drilling services to the international oil and gas industry. Clients took the opportunity to switch out of longer dated USD bonds that had rallied in price and saw a shortening duration, such as the Navient 2033 fixed rate bond. On the back of oil price increases, the price of Ensco also increased – it is available at an indicative yield to maturity of 7.96%
  • Hertz’s 2022 fixed rate bond remained a popular bond over the week, being relatively liquid and trading in both the Asia Pacific and US time zones. The bond also allowed clients to shorten duration with its 2022 maturity. We saw clients switch out of the NCIG 2027 callable fixed rate bond, where there are some decent gains, and move in to the Hertz 2022 bond. Hertz 2022 is available at an indicative yield to maturity of 7.04%

Economic wrap

  • Yields increased throughout the week as markets start to price in a less accommodative stance by central banks
  • US non farm payrolls is released on Friday with the jobs forecast to be 175k
  • Oil and iron ore both rallied strongly last week, with gains of circa 10% and 15% respectively
  • China’s Purchasing Managers’ Index data surprised on the upside with a reading of 51.7 in June

Other news

Global central banks put out a coordinated message last week talking about “normalising” interest rates. Markets reacted sharply with US 10 year rates jumping 16bps, German rates moving from 26bps to 47bps and Japanese 10 year rates from 5bps to 8bps. Australian interest rates moved up 24bps, more than any other major market, suggesting the RBA’s path in the next few years will be closely tied to global interest rates. However, this is at odds with Australia’s economic trajectory relative to the rest of the world. Labour demand in Australia is weak and underemployment at levels is only exceeded by the 1990s recession.

Further warnings about Australian housing pour in from overseas and domestic spokespersons, most notably San Francisco Federal Reserve president John Williams. Yet auction clearance rates are staying above long term averages and prices are holding up, even through traditionally weaker winter months.

There is little doubt there is an oversupply looming in apartments in inner suburbs of Brisbane, Melbourne and Sydney. What offshore commentary fails to understand is that Australia’s unique geography and demographics, coupled with relatively high population growth and concentrated urban infrastructure, means that desirable land is scarce and constantly under pricing pressure. A near term correction in apartment prices could be as much as 20% in real terms, which will hurt the economy through a sharp downturn in construction and consumer confidence. But, for the majority of consumers with much of their personal wealth tied up in houses, the impact will not be a US style consumer downturn as the Fed president predicts. 

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