Tuesday 22 August 2017 by Leigh Winton Week in review

From the trading desk

Credit indices widen as Trump wallows, increased appeal in 10 year US Treasuries, a new GBP DirectBond from Petrobras, RWH and Sydney Airport remain in favour and investors look to diversify with the new Avon Products 2022 bond

What’s trading

AUD

  • It’s been another difficult week for supply in AUD after some of our favorites evaporated, particularly the Liberty financial 2020 bond for which yields are tightening on the back of limited supply.
  • Despite limited supply, we were able to find some attractive RMBS offers including the REDS 2017-1 C notes that fit the bill nicely with a weighted average life of 6.8 years (based on our principal repayment assumption) and a higher credit rating. These RMBS pay a floating rate coupon of 3.45% over the one month Bank Bill Swap Rate. There is limited supply available that is offered at an indicative forecast yield of 5.36% pa.
  • The most traded AUD bond last week was the Royal Women’s Hospital IAB 2033 bond. Having been upgraded three notches, investors who held the bond are looking to exit, while  demand was strong as other investors wanted to add rated bonds into their portfolios.
  • The Sydney Airport 2030 bond continues as a popular trade with yields tightening about 5bps over the week. There’s strong demand and ready liquidity for those interested in taking profits.

Non AUD

  • The ‘tech switch’ of Dicker Data 2020 into Rackspace 2024 has been popular over the past week with investors looking to move from the AUD denominated Dicker Data into the USD denominated Rackspace. The trade adds geographical diversity, a pick-up in yield of 1.5% and moves the investment further along the tenor curve. We expect this trade to continue as strong demand for Dicker Data is making the price attractive for current holders to exit.
  • After adding the Avon Products 2022 bond to the menu last week, we saw strong demand, with investors looking to diversify into a new sector (consumer products). Avon Products 2022 are currently trading at an indicative yield of 6.15% tightening slightly during the week, as strong institutional buying in Asia took place.
  • As per previous weeks, the automotive issuers have seen strong buying.  American Axle 2025 tightened 17bps along with Hertz 2022 tightening 19bps. We still expect strong buying to continue with the indicative yields on both still 5.9%p.a and 6.9%p.a respectively.

Economic wrap

  • US credit indices widened as part of the flight to quality at the end of last week after Trump fired chief strategist, Steve Bannon, raising further concerns on the credibility of the Trump presidency.
  • The Markit CDX North America investment grade index sits at 62.35 today versus 57.23 at the end of July, and there has been a similar, although smaller, move in the Bloomberg Barclays high yield index.
  • 10 year US Treasuries closed the week at 2.19%, down with safe haven characteristics increasing appeal.
  • Central bankers meet in Wyoming later this week with a major topic being the future of quantitative easing (QE) and how to end it gradually.

Other news

On Friday, the senior unsecured debt from Petrobras denominated in pound sterling was made available to FIIG clients as a DirectBond. The bond requires GBP100,000 minimum investment, has a BB- credit rating and yields circa 5.50%. The company is in the oil and gas business and has significant Brazilian government ownership. The factsheet is available here for interested parties.

Switching from bank and insurer subdebt into highly rated RMBS continues unabated. We continue to believe this makes sense for investors who benefit from a credit rating upgrade. Additionally, the structure of RMBS leads to credit improvement over time as borrowers pay down mortgages. Tier 2 subordinated debt (particularly non viability conversion clauses) are for the protection of the issuer.

This week, we have access to a variety of RMBS notes originated by Liberty Financial with expected weighted average life of 3.1 years. With equivalent rated bank debt yielding less than BBSW +150bps, the value proposition is compelling and provides a significant pick up in expected return.

AMP announced a sub debt Tier 2 issue expected to be a 10.25 year maturity callable after 5.25 years. This will replace a December 2017 maturity and is expected to be in high demand.

Royal Women’s Hospital annuities remain in favour after the completed refinancing and subsequent credit rating upgrade.  These bonds have continued to receive a boost from mandate restricted buyers who can include them in their portfolios now that they have a minimum A- or equivalent rating.

In our opinion, call risk is not considered enough by investors who focus more on yield to maturity. Although we have no insight on the likelihood of call by Aviation Training (AAT) in November 2017, investors must remember that in the event of call by the issuer, the yield earned if called at 102.00 makes this poor value and we consequently encourage owners to take profit.

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