Tuesday 05 September 2017 by Leigh Winton Week in review

From the trading desk

US unemployment data weaker than expected, Eurozone inflation hits a four month high, offers reappear in Adani Abbot Point, new DirectBond added Windstream 2020, strong demand in Barminco 2022 and Ensco 2025 bonds, and the RWH annuity, RMBS bonds and inflation securities in high demand

What’s trading

AUD

  • Demand continues for Residential Mortgage Backed Securities (RMBS) as clients  favour investment grade allocations in their portfolios.  At the moment, we have good supply in a couple of different RMBS names, and all have high credit ratings.  The Liberty 2017-1 B notes – AA rated - are still available at an indicative forecast yield of 4.12% and the Reds 2017-1 B notes, also AA rated, are available at 4.50%.  The most popular trades have been out of the subordinated bank bonds as some of these bonds have a lower rating and  lower indicative yield compared to the two RMBS securities
  • It remains a seller’s market at the moment as supply is limited, bonds are in demand and prices continue to creep higher. Last week, supply in the Liberty Financial 2020 fixed rate bond (not to be confused with the RMBS offering) was uncovered, satisfying pent up demand. This bond is offered at an indicative yield to maturity of 4.31%. Another well bid bond is the Royal Women’s Hospital Indexed Annuity bond.  This inflation linked bond has proven to be popular with the recent Moody’s credit rating upgrade post the successful refinancing. It remains in supply at an indicative yield of 5.31% (*2.5% inflation assumption)

Non AUD

  • Last week, the Windstream Holdings October 2020 senior bond was added to the DirectBond list, expanding the range of telecom offers in the USD high yield space. Windstream is a leading provider in advanced network communications and technology solutions for consumers, businesses, enterprise organisations and wholesale customers across the United States. Otherwise, flow was mixed elsewhere in the USD space.. The resources and energy space was active again with strong demand in both the Barminco May 2022 and Ensco March 2025 senior bonds. Both lines are still in good supply at indicative yields of 6.81% and 9.27%, respectively. The Rackspace Hosting November 2024 also proved popular after a parcel of cheap supply became available midweek with bonds still available at a yield of around 7.00% 

Economic wrap

  • Last Friday, US unemployment data was generally weaker than expected with lower readings for the unemployment rate itself as well as new jobs added and average hourly earnings
  • However, US treasury yields moved higher after the Institute of Supply Management (ISM) index jumped to a six year high and 10 year US government bonds closed at 2.17%. There is a strong likelihood that the Fed will announce plans to start balance sheet reduction in September and possibly raise rates again at the December FOMC meeting
  • Eurozone inflation hit a four month high in August due to rising energy prices. The core inflation data without volatile items was flat at 1.2%. The ECB is expected to wait for the Fed’s balance sheet reduction program announcement before they consider some gradual tapering of their own quantitative easing (QE)

Other news

On Friday, the senior unsecured debt from Windstream, denominated in US dollars, was made available to FIIG clients as a DirectBond. The bond requires minimum USD10,000 investments, has a B+ credit rating and yields circa 10.75%. The factsheet is attached for interested parties and naturally, there is significant risk with a 2020 security that has a yield above 10%.

Inflation securities remain in demand as  the Sydney Airport 2020 bonds continue to trade above their indexed face value and the 2030 securities much closer to their indexed level.

RWH annuities continue to trade with new buyers locking in the CPI + 2.81% margin for the Moody’s equivalent of an S&P ‘A’ rating. Some former holders of the refinanced nominal security have stepped up to purchase with the bank financing complete and the consequent shortage of available supply in the issuer name.

Offers have reappeared in the Adani Abbot Point securities, post our recently published research highlighting the refinancing challenge ahead and suggesting investors consider exiting, especially as the current exit price is above $100.00.

Rackspace released 2Q17 results with reduced leverage and increased free cashflow. Despite a move lower in the bonds, our independent third party credit research provider is still keen on the 8.625% 2024s, which currently yield 7.00% yield to maturity (YTM) or 6.50% yield to worst (YTW).

Hertz continues to be volatile with differences of opinion between the bond and equity markets and the credit default swap (CDS) levels. Normally, CDS has a strong inverse correlation with bonds as increase in CDS price means higher probability of default and consequent bond weakness. Our same leading independent, third party credit research provider believes CDS market mechanics are driving the higher prices being paid for default protection, and they rate the 7.625% 2022 securities as outperform. These have a YTM of 6.69% and a YTW of 6.49%.

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