Monday 14 August 2017 by Leigh Winton Week in review

From the trading desk

US CPI weaker than expected, RBA mentioned rates will go up but not for some time, demand for RWH IAB bond following positive rating news and popular trades in Ensco, Pepper and automotive issuers

What’s trading

AUD

  • Clients went looking for other investment grade bonds after supply of the Liberty Financial 2020 fixed rate bond dried up. Residential mortgage backed securities issuer, Pepper’s 2017-18 B notes fit the bill nicely with a weighted average life of 3.6 years (based on our principal repayment assumption) and a higher credit rating. These RMBS pay a floating rate coupon of 2.75% over the one month Bank Bill Swap Rate. There is limited supply available, offered at an indicative forecast yield of 4.31% pa
  • After Royal Women’s Hospital successfully completed it’s refinancing of the nominal bond, Moody’s has upgraded the IAB 2033 bond by three notches. There has been demand for the IAB 2033 with the refinancing risk now removed and the positive ratings news. Limited supply of the bond is available at an indicative yield to maturity of 5.43% pa (including a 2.50% inflation assumption)

Non AUD

  • Global beauty manufacturer, Avon Products had their August 2022 fixed rate bond added to the DirectBond list last week. The Avon brand ranks within the top five brands in the world in the beauty and personal care category and has 90% brand recognition in most major global markets. The senior bond pays a semi annual coupon of 6.25% and is currently available at an indicative yield to maturity of 6.19% pa
  • USD investors chasing high yield were drawn to the energy sector last week as improved offers of the Ensco March 2025 senior bond followed after the company’s share price fell. Supply remains decent at an indicative offer yield of 8.98% pa. Also in the energy space, Transocean July 2023 became available in limited volume during Asia trade. A small supply is currently available at an indicative yield of 7.55% pa
  • Automotive issuers Hertz Corporation and American Axel traded heavily continuing the prior week’s trend. Both the Hertz June 22 and Axel April 2025 senior bonds remain in good supply at indicative yields of 6.89% pa and 6.18% pa respectively

Economic wrap

  • US CPI last Friday was weaker than expected, rising only 0.1% for July on a seasonally adjusted basis
  • This week, the FOMC minutes are released with the timing of balance sheet unwinding the main focus
  • US dollar short positions continue to be amassed according to official CFTC data. If the Australian dollar can manage a weekly close above 0.8000, technicians will start calling for it to move higher
  • RBA governor, Philip Lowe, spoke Friday mentioning that it is  reasonable to assume that rates will move up but it will not be for some time

Other news

Yields have moved higher on AAPT 2020 encouraging opportunistic buying from the yield hungry who believe the coal terminal is essential infrastructure for users (BHP, Glencore, QCoal, Yanzhou, and Lake Vermont). Although we are inclined to believe the value here lies at lower prices, the lack of supply in most AUD names and the significant number of recent maturities may well provide support. Between AAPT 2020 and AAPT 2018, the longer maturity certainly appears to be more attractive at a 0.91% higher yield to maturity.

Liberty Financial’s 2020 senior bonds remain a firm favourite for clients with their investment grade rating and a premium rate of return to comparables. Supply became scarcer last week and the yield has narrowed to 4.25%. Nevertheless, it continues to offer value in comparison to the AusBond Credit +0Yr Index. The index (which covers Australian investment grade corporate bonds) has a yield to maturity of 2.92%.

Tesla announced the offering of US$1.8bn corporate bonds with a provisional rating of ‘B2’ (S&P equivalent B) at 5.25% for 8 years. Sub investment grade bonds typically have robust bondholder protections, or covenants, but those available on Tesla’s provide very few limitations. According to Moody’s, covenants in the US High Yield market are currently as weak as they have ever been on new issues. Fixed income security analysis is as much about the investor protections available as it is about company quality and debt serviceability, and we encourage investors to ask about covenant packages on the bonds they are considering. 

Get your free copy of The Benefits of Corporate Bonds eBook

Get a copy of The Benefits of Corporate Bonds eBook

Subscribe to The WIRE newsletter

Sign up to a free weekly newsletter to get the latest investment news.