Tuesday 12 September 2017 by Leigh Winton Week in review

From the trading desk

Australian unemployment data due out Thursday, US GDP forecasts downgraded post the Florida storms, IPG to redeem notes as part of Pro-Pac’s acquisition, QBE rating reaffirmed, popular trades in Barminco, Rackspace and Avon, with Dell bonds a good switch target. Continuing trades in high yield RMBS and Sydney Airport 2020 and 2030 bonds

What’s trading

AUD

  • Clients have been looking closely at the flight to quality trade with more investors looking at taking profits from a strong rally in subordinated debt, and high yield names. We have seen growing interest in government and semi government bonds, as well as high rated RMBS and senior bank debt. The global economy is on high alert with news  out of North Korea and the US seemingly worse as weeks go by; we expect this trade to become more common as investors look to protect their investments.   
  • As noted above, RMBS continues to be in strong demand with strong buying in the Reds 2017-1 B notes that has almost exhausted supply. However, a parcel still remains and is currently trading at an indicative yield of 4.50%pa. We also have supply in the Liberty 2017-1 B notes which are currently trading at an indicative yield of 4.09%paBoth these notes are rated AA.
  • The Sydney Airport bonds have again been an active trade for investors with good two way flow between them. Both the 2020 and 2030  bonds have seen a significant price rally of late, however still offer great relative value. Buyers of the 2020 bond have been looking to reduce their interest rate exposure and move further out the tenor curve, whereas the opposite stands for the 2030s. However,  a higher yield rewards the longer date bond holders.

Non AUD

  • USD supply was limited early in the week with the US market closed on Monday for the Labour Day long weekend, but mining services provider Barminco Finance proved popular as supply continued to flow out of Asian trading desks. Many clients chose to take advantage of the high Aussie dollar by crystallising gains in the AUD high yield space and switching exposure to USD. The Barminco May 2022 senior bonds remain in good supply at an indicative yield of 6.81%
  • Elsewhere in the USD space, Rackspace Hosting remained in high demand with the higher AUD offsetting increases in the offer price. Beauty manufacturer Avon Products August 2022 senior debt also traded heavily after supply became available later in the week. Both Rackspace and Avon remain available at indicative yields to worst of 6.43% and 5.80%, respectively

Economic wrap

  • US 3Q GDP forecasts are being downgraded post the Florida storms. Expectations are for 2.5% GDP compared to close to 3% previously
  • US Treasury yields moved lower during the week closing at 2.05%, and these bonds continue to be in demand with lingering uncertainty surrounding North Korea
  • Australian unemployment data is due out Thursday with expectations of +19,000 jobs and a 5.6% jobless rate

Other news

Pro-Pac’s bid for Integrated Packaging Group (IPG) should anchor the IPG security around $102.00 where the bond is callable until September 2018. There is a change of control provision in favour of noteholders at $101.00.

Demand for the Sydney Airports 2030 bonds continues with bid price of $128.738, only around $1 lower than the current indexation level of $129.88, that is the capital value of the bond. This is the narrowest differential in two years.

QBE had their rating affirmed at BBB- by S&P, with Florida’s Hurricane Irma having been downgraded and the ratings agency mentioning the reinsurance contracts QBE has in place.

Our independent, third party credit research provider has reiterated their market perform recommendation on Dell’s bonds. This is subsequent to Dell’s disappointing results from mid market storage being brightened by the company reducing its core debt and remaining committed to further de-levering. The Dell 2028 bonds have an indicative yield to maturity of 5.30% and a running yield of 6.20%. Although Dell does not yet meet our DirectBond filters, they are still a good switch target for the Transalta 2040 and the Centurylink 2039 bonds as well as conforming to our shortening maturity bias. 

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