Tuesday 01 August 2017 by Leigh Winton Week in review

From the trading desk

AUD breaks through USD80 cents, iron ore price consolidates, popular trades include Ensco, Sydney Airports, FIIG originated bonds

What’s trading

AUD

  • Last week was the final opportunity for clients to sell their G8 Education Fixed holding prior to the early redemption date. Clients made the most of this and switched in to other bonds on offer; in particular other high yielding bonds such as the Dicker Data 2020 floating rate bond. Clients are still able to reinvest their redeemed funds now by booking a settlement date after the funds are due to be received. Dicker Data 2020 is still available in limited supply at an indicative projected yield to maturity of 5.00%.
  • Liberty Financial 2020 fixed rate bond continued to be the most traded bond over the week. Its short dated maturity and investment grade rating makes it attractive to clients who are chasing a more defensive addition to their portfolio. The most popular switch has been out of unrated bonds as clients rebalance their allocation.  Liberty 2020 remains in good supply and is available at an indicative yield to maturity of 4.67%. 

Non AUD

  • Last week, USD trading was dominated by the Ensco March 2025 senior debt as cheaper offers from the street despite the higher oil price spurred demand. Ensco is a leading provider of offshore contract drilling services to the international oil and gas industry. Ensco remains in good supply at an indicative yield of 8.19%.
  • Rackspace also proved popular among investors. Access to the software services company’s November 2022 senior debt offering remains good at an indicative yield of 6.30%.

Economic wrap

  • US data was mixed with GDP on target at 2.6% and weaker employment cost data but stronger consumer sentiment.
  • Australian CPI was weaker with the annual rate dipping again below 2% last week. We continue to prefer the Sydney Airport 2030’s to the Sydney Airport 2020’s on the back of this.
  • Oil rebounded circa 1.75% at the end of last week with Brent crude at $52 a barrel and WTI circa at $50. Iron ore closed above $65 cementing its rally from $55 in June. 

Other news

We suggest that clients take advantage of liquidity, spread contraction and to lighten up on high yield. The flows we have seen reflect this with AxsessToday, Dicker Data, and RSEA bonds trading in larger than usual volume. Spreads remain tight and there is residual demand across the spectrum of AUD high yield allowing for continued diversification or profit taking.

Although FIIG is a bond house and our foreign currency services exist only to expand the fixed income offering, a discussion of FX is unavoidable given that the AUD/USD intraday peak was at 0.8066 on Thursday. Many investors see this level as opportune to buy USD product noting the increased USD face value they can purchase for an AUD investment.

USD bonds Ensco, Frontier, RackSpace, and Hertz continue to accumulate in portfolios and we expect volume in the new DirectBond American Axel to increase. As a reminder, the company is a supplier to the US auto industry and is currently in the process of a merger with Metaldyne Performance Group. Talk to your FIIG relationship manager to learn more and discuss its suitability in your portfolio.

Liberty Financial closed the largest ever Australian nonbank and nonconforming securitisation since the GFC a fortnight ago which was issued on Wednesday 26 July. This was Liberty’s third RMBS transaction for 2017 and we were able to access some of the junior notes for investors. The deal was upsized to $1.2bn resulting in an improved underlying pool of loans and higher credit ratings for the D, E, and F Notes than those provisionally provided by Moody’s. According to KangaNews, Liberty “ascribes its success to the inclusion of a euro-denominated tranche and conducive market conditions.”

 

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