Tuesday 29 August 2017 by Leigh Winton Week in review

From the trading desk

The Australian dollar is trading above 0.79, US unemployment data is released this Friday, Fed governor Powell warns of failure to raise the government’s borrowing limit and strong demand for Novacare 2033 and Barminco 2022 bonds. Also, new DirectBonds from Petrobras Global Finance and new supply in Liberty RMBS notes

What’s trading

AUD

  • Last week, we had an institutional seller of the Novacare indexed annuity 2033 bond, which was snapped up quickly by pent up demand for investment grade bonds. Clients continue to reduce their unrated exposure and reallocate to investment grade securities. Despite inflation remaining low domestically, the Novacare bonds still offer a relatively attractive yield for the investment grade rating compared to peers of the same maturity. 
  • In the Residential Backed Mortgage Security (RMBS) space, we sourced supply of the Liberty 2017-1 B notes, also investment grade and well received by clients. The notes pay a coupon of 2.85% over the Bank Bill Swap Rate (BBSW) and offer clients exposure to floating rate notes being RMBSs. Many clients chose to switch out of their existing lower credit rated sub debt positions to purchase this security. Recently, subordinated bank bonds have rallied significantly and clients are able to take profits and move into higher rated securities. The Liberty 2017-1 B notes are still available  at an indicative forecast yield of 4.12%.

Non AUD

  • Last week saw active trading in the GBP space following the addition of the Petrobras Global Finance December 2026 senior debt to the DirectBonds list. GBP denominated supply is very difficult to source, especially in the high yield sector. Available at an indicative yield of 5.22%, Petrobras is the highest yielding GBP security offered by FIIG. A number of investors elected to move from the BHP Billiton 2022 subordinated debt into the Petrobras senior debt, moving up the capital structure but extending duration and opting for a lower credit rating for the sake of higher yield.
  • The Barminco Finance May 2022 senior bond experienced strong demand last week after Moody’s maintained the negative outlook on the company’s rating. Following Moody’s report, price weakness allowed clients to enter positions under par. Supply remains good at an indicative yield of 6.78%.

Economic wrap

  • US unemployment data is released this Friday with the rate forecast to be unchanged at 4.3% according to Bloomberg. They are expecting 180,000 of new jobs to be added and average hourly earnings to be +0.2%.
  • The tone of the speeches by central bankers at Jackson Hole leads us to believe the Fed is more in ‘wait and see mode’ for now. Fed governors Powell and Kaplan alluded to this with Powell also warning that a failure to raise the government’s borrowing limit could bring real pain to the economy.
  • The US dollar continues to be sold off, helped by the ECB’s Draghi omitting to comment on the stronger Euro when he spoke last week. The Australian dollar is trading again above 0.7900 helped by stronger oil and iron ore.
  • Eurozone inflation is released Wednesday with yearly forecasts ranging between 1.5%-1.7%.

Other news

On Friday, the senior unsecured debt from Vale denominated in US dollars was made available to FIIG clients as a DirectBond. The bond requires USD10,000 minimum investment, has a BBB- credit rating and yields circa 4.30%. The company is in the iron ore and nickel business and has a competitive cost position. The factsheet is attached for interested parties.

We saw some flow in Novacare last week which is a highly rated indexed annuity bond (IAB) with final maturity in 2033. The underlying cashflows supporting the security are State backed and with the project in operational phase, the security is ordinarily viewed as low risk despite its higher leverage and limited financial flexibility associated with PPP style financings. The Novacare supply was quickly snapped up and we suggest interested buyers take another look at the Royal Women’s Hospital IAB where supply is better. With refinancing completed, these RWH securities yield CPI +2.83%, have an S&P equivalent ‘A’ rating and have a similar final maturity to Novacare.

Adani Abbot Point supply has been absorbed and there is now demand for these securities. As a reminder, we recently published research highlighting the refinancing challenge ahead and suggest investors consider exiting, especially as the current exit price is 100.00. Investors who delayed selling but have ongoing concern should now consider doing so.

Last week, we released our inaugural sample portfolios. There are two of them, one being an all Australian Dollar investment grade portfolio yielding 4.45% and a second higher yielding portfolio (5.87%) comprising an allocation to USD bonds and below investment grade (IG) securities. Please contact your FIIG relationship manager or us directly to see a copy and discuss.

The intention of the sample portfolios is to show the breadth of names available for clients to invest in. The portfolios also fit with the PSS and Research themes of having allocations to fixed rate, floating rate and investment grade bonds, having a portfolio targeting 20+ securities across a number of sectors, and for the maturity of the USD bonds in particular to be shorter than 15 years. 

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