Tuesday 19 September 2017 by Leigh Winton Week in review

From the trading desk

Strong employment numbers released last week, focus on US Federal Open Market Committee meeting while RBA minutes are expected. Strong trades in Barminco and in Rackspace despite a Moody’s downgrade and a comeback for FIIG bond issuance. The RMBS space is attractive with new SMHL and La Trobe notes

What’s trading

AUD

  • This week, clients continue to look at the flight to quality trade. We have seen an increase in buying of semi government bonds and in particular, Queensland Treasury Corp 6.5% 2033 bonds (rated AA+) with  a current indicative running yield of 4.80% and Victorian Treasury Corp 5.5% 2026 (rated AAA) with an indicative running yield of 4.53%
  • FIIG originated bonds make a comeback with supply available in StockCo 8.75% 2022 bonds. StockCo provides short term livestock financing facilities for the farming community and has had a fantastic run since issuance. Its 2022 bond is currently trading at an indicative yield of 6.40% pa. There is also  steady trading in other FIIG bonds, including zipMoney Trust 2017-1 B notes with an indicative yield of 6.62% pa and the Adani Abbot 7.10% 2020 with an indicative yield of 6.39% pa – this bond has also seen strong institutional buying of late
  • New RMBS, the SMHL 2017-1 D and the La Trobe 2017-2 E notes saw some clients participating at first issue. There was also heavy trading in the Reds 2017-1 B notes with supply now exhausted and the Liberty 2017-1 B notes have also seen steady trading with only a small parcel remaining. We will continue to search for more supply but consider that demand will likely far outweigh supply for the foreseeable future

Non AUD

  • Last week, demand for mining services provider Barmino Finance remained strong as supply of its May 2022 fixed rate senior bond continued to flow out of Asian trading desks. The price of Barminco dropped earlier this year after they lost a contract with the Kundana gold mine. Clients  can access the bond below par at an indicative offer yield of 6.84% pa
  • Technology services company, Rackspace Hosting was placed on review for downgrade by ratings agency Moody’s following its acquisition of competitor Datapipe Inc.. Moody’s cited potentially higher leverage and execution risks as reasons for the review. Despite the move, Rackspace remained popular among investors hunting yield in the USD denominated space. Supply is currently available at an indicative YTM of 6.96% pa
  • Brazilian energy producer Petrobras saw modest trade flow last week as clients looked to move out of lower yielding GBP positions into the company’s Dec 2026 senior issue. At an indicative offer yield of 4.89% pa, Petrobras is the highest yielding GBP option offered by FIIG. Supply in the GBP space is generally difficult to source - for clients looking to invest, it is not uncommon to be waiting upwards of a week for supply 

Economic wrap

  • Last week’s employment numbers were strong with 54,200 jobs added, the bulk of which were full time. Headline unemployment remained unchanged as a result of an increase in the participation rate to 65.3% ahead of 65.1% expected
  • US retail sales and industrial production figures were poor and the University of Michigan’s consumer sentiment index also eased
  • On Tuesday, the RBA board minutes will be released, but key for central bank watchers will be the FOMC meeting where a decision on balance sheet reductions should be announced. This will come just shy of the ninth anniversary of QE1

Other news

Demand continues to be strong for AUD investment grade bonds with almost all fixed rate lines well bid. The surprising turn this week has been the extension of that demand to the longer dated, inflation linked universe including AGN, Plenary Health, and Plenary Justice. On a to-maturity basis, the return on these securities is a set margin over the realised inflation rate – any current holders who cannot see CPI growth above 2% in the medium term may wish to reduce exposure.

We have access to a number of AA rated RMBS lines from transactions issued during 2016 and 2017. Recently, the issuance into this market has been significant and we are seeing supply as a result. Lower rated tranches remain difficult to source. We currently have small availability in Liberty 2017-1 Class B at a forecast rate of return in the low 4% range, which is substantially wider than equivalently rated corporate bonds.

Despite the increase in leverage for a late 2016 acquisition, US auto parts supplier American Axle (AXL) is well positioned as the electric vehicle sector starts to ramp up over the next decade and reported good results for 2Q17. AXL 2025 has scope to perform well based on current pricing relative to other high yield names, although with a ‘B’ rating prospective, investors should make sure they are well diversified. 

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