Tuesday 08 August 2017 by Leigh Winton Week in review

From the trading desk

RBA released the Statement on Monetary Policy, retail sales figures expected to shift the domestic market, redemptions in G8 and RWH Finance and continuing popular trades in Frontier, Hertz, Liberty Financial, Sydney Airports, NEXTDC and Dicker Data

What’s trading

AUD

  • The AUD HY space has been in short supply, and with the redemptions in G8 and surprise redemption in the Royal Women’s Hospital floating rate bond, supply looks like it may get even tighter. However, there have been some excellent opportunities in the market with increased trading in NEXTDC 2021 after some limited supply became available at an indicative yield to maturity of 5.2% pa and Dicker Data 2020 at 5.0% pa
  • The Liberty Financial 2020 bond continues to be the most favoured home for investors looking to place G8 and Royal Women Hospital redemption funds.  Liberty 2020 still remains in good supply and is available at an indicative yield to maturity of 4.37% pa
  • We are also seeing a good two way flow in Sydney Airports’ 2020 and 2030 bonds as investors look to rebalance their portfolios to align with views on inflation and interest rates. We expect this trade to continue for the following week

Non AUD

  • Hertz Corporation June 2022 senior bond experienced heavy trading last week after the company announced it had cancelled plans to redeem some of its debt. Price depreciation following the announcement spurred demand in the bonds. The 2022 bond is currently available at an indicative yield of 7.12% pa. Continuing the automotive theme, American Axel also proved popular last week with current good supply at an indicative yield of 5.92% pa
  • Frontier Communications January 2023 senior bonds experienced heavy trade flow late in the week among high yield investors following 2Q results. The bonds remain in good supply at an indicative yield of 10.78% pa

Economic wrap

  • Local June retail sales figures printed ahead of expectations on Thursday at 0.3% month on month, one day after the announcement of Amazon’s upcoming Melbourne warehouse that  is expected to fundamentally shift the domestic market in coming years
  • US high yield bond spreads narrowed further and averaged 375bps in July according to a composite measure compiled by Moody’s. Its analysis indicates that this is due “more to abundant liquidity than to a superior outlook for operating earnings”
  • US unemployment and payroll data was better than expected with the headline rate dipping back down to 4.3%
  • The RBA released the Statement on Monetary Policy on Friday. In the quarterly publication, the outlook for the economy was revised lower and the central bank expects to see inflation rise to 2.5-3.0% over the next twelve months

Other news

On Thursday, the maturity proceeds of Royal Women’s Hospital FRN were received and have been distributed to holders. This occurred without prior notice from the trustee and not on a coupon payment date. Investors should have received a note from our Custodial Services team. Former holders of the FRN will be looking for replacements and we expect to see bids across the BBB/BB space and some tightening of supply. Holders of the indexed annuity bond should expect Moody’s imminent upgrade (as mentioned last week) and look to close out that strategy by taking profit.

The likelihood of Genworth Financial (US parent of ASX:GMA) closing the proposed merger with China Oceanwide has reduced significantly as a result of the current American political climate. Investors who purchased Genworth 2021 (USD) expecting upside resulting from a positive outcome of this deal should speak to their relationship manager about that position. The last few days has seen some holders taking the opportunity to switch to other high yield USD names such as Ensco, RackSpace, and Hertz and we encourage others to do the same. At the time of writing, AUD/USD is at 0.7934 which is encouraging investors to diversify into other USD bonds.

Diversity is a popular topic for us and the driver behind many of the portfolio reviews we provide to clients. We maintain our recommendation to take advantage of liquidity and spread contraction and to diversify portfolio exposure to subinvestment grade or unrated bonds significantly. Our model portfolio currently contains 20 distinct issuers and riskier credit portfolios should contain even more.

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