Tuesday 31 October 2017 by Leigh Winton Week in review

From the trading desk

US CPI was robust while Australian figures came in below expectations. Heavy trading in USD Frontier 2021s and NCIG 2027 with modest supply available in Rackspace and Avon. The Queensland Treasury Corp 2030 bond a popular inflation trade, strong two way flow between the Sydney Airport 2020 and 2030s and supply exhausted for the Liberty 2020 bond and all RMBS lines. Improving aluminium price supported strong performances from Alumina and Alcoa this year

What’s trading

AUD

  • Inflation trade continues to be popular following Australian CPI figures released last week which prompted heavy trading across inflation linked lines. A popular trade was remaining long duration but switching into the Queensland Treasury Corp 2030 bonds, as investors look to move into more highly rated notes, These are currently trading at an indicative yield of CPI+1.48%. The Sydney Airport 2020 and 2030 bonds also experienced strong trading as both are rated BBB (by S&P) with indicative yields of CPI+2.18%pa and CPI+2.91%pa, respectively
  • The Liberty 5.1% 2020 bond has been a favourite for investors with supply drying up. A decent parcel did become available but this was snapped up and offered investors a yield of 4.15%pa. to maturity. This bond remains well bid and we will continue to search for supply
  • RMBS continues to be popular due to similar credit ratings to bank debt but higher yields on offer. We were able to obtain some attractive C notes (rated A+) yielding 5.27%pa with a weighted average life (WAL) of 6.2 years. These were sold quickly and we are currently flat in all RMBS lines

Non AUD

  • Frontier Communications Corporation experienced heavy trade flow across the whole credit curve following the addition of the company’s 9.25% July and 6.25% September 2021 senior bonds to the DirectBond list last week. Shortening of duration was the main theme with investors moving exposure from the June 2025 and January 2023 lines into a mixture of the two 2021 issues. The trade resonated with many clients following recent price weakness and fears of potential refinance risk in the longer dated lines. Supply is currently available in both the July and September 2021 bond at yields of 12.29% and 11.32%, respectively
  • The Newcastle Coal Infrastructure Group March 2027 senior unsecured bond continued to trade heavily last week as bid interest from the institutional market remained strong. Clients looking to exit their NCIG position can expect to do so around an indicative yield of 8.37%
  • Elsewhere in the USD high yield space, technology services company Rackspace Hosting and global beauty manufacturer Avon Products both experienced decent flow as modest supply became available via the street. Rackspace and Avon are currently offered at indicative yields of 6.61% and 6.54%pa, respectively

Economic wrap

  • US 3Q GDP was robust and printed at 3.0% (consensus 2.6%) boosted by better than expected Personal Consumption at 2.4% (cons. 2.1%). Inventories also helped but this impact may reverse out over the coming quarters
  • Australian inflation continued to be missing in action, with headline year over 3Q CPI missing expectations at 1.8% (cons. 2.0%) It was a similar story for the RBA’s favoured measures – Trimmed Mean 1.8% (cons. 2.0%) and Weighted Median 1.9% (cons. 2.0%); it will be interesting to see if the RBA has anything additional to say on the subject next week

Other news

Our recommendation to ‘Be efficient in Frontier’ may not have been the best play on words, but it certainly resonated with a large number of holders of FTR 2025s. We continue to believe that being at the shorter end of the issuer curve is sensible as refinancing risks remain beyond 2021.

Strong two way flow continues between Sydney Airport 2020 and 2030s. Investors who believe that long term rates will follow global counterparts and inflation will remain benign, have been moving to the 2020s as they see a widening in real yields and a selloff in the 2030s.

Others believe that inflation targeting monetary policy will lead to mean reversion and thus see more value in the 2030s. We think both strategies are valid, but point out that corporate ILB/IAB issuance is non existent and as supply reduces, real yields should naturally tighten.

The performances of Alumina and Alcoa (majority owner) have been strong this year, largely as a result of an improving aluminium price. S&P outlined in April that an improvement in creditworthiness of Alcoa may well flow through to Alumina.

A return to investment grade on the 2019 bonds would substantially reduce the yield to maturity, given the coupon will step down to 5.5% from 6.75%. The bonds can also be called in May 2019 which would reduce the rate of return by 50-60bps.

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