Monday 11 December 2017 by Leigh Winton Week in review

From the trading desk

Adani calls November 2018 bond, pricing to come. Frontier 2025 holders switch to shorten duration and Noble offers attractive yield over Transocean 2023. RMBS continues as  a target out of subordinated debt, sell offs in longer dated Aussie IABs, and popular trades in Challenger 2022, Cash Converters 2018 and Merredin 2022 bonds

What’s trading 

AUD

  • Challenger recently issued a floating rate note, callable in 2022, which was actively traded. The bond tightened 2bps throughout the week in line with our expectation of continued tightening until it is in line with comparables such as the AAI 2022 callable at 3.65%pa. We still have decent supply. However, we believe this will diminish with increased trades, as more hold to maturity investors look to add this to their portfolios. Currently, investors can purchase the 2022 bond at an indicative yield to worst of 3.85%pa.
  • A popular trend has seen investors exiting longer dated holdings as they expect rates to start rising. There was higher than usual selling of the longer dated indexed annuity bonds (IAB), including, Royal Women Hospital 2030 and the JEM NSW School 2035 bonds, with many investors sitting on healthy capital appreciation.  A popular switch was into the Sydney Airport ILB 2020, as investors are still after the inflation hedge in their portfolios.
  • RMBS has long been an investor favourite as the yield being offered when compared to similar rated bank debt looks too good to pass up. We continue to see investors exiting their positions in subordinated bank debt and moving into RMBS. A popular switch was into some “A” rated C notes with a weighted average life of 4.3 years and a forecasted yield of 4.63%pa 

Non AUD

  • The energy sector was actively traded last week, with the January 2024 fixed rate senior bond from Noble Holdings International being the most popular USD bond on offer. Transocean Inc. July 2023 senior fixed rate note proved to be a good switch target as many clients chose to take advantage of an attractive institutional bid and move into the higher yielding Noble bond. The switch is still viable with clients able to exit Transocean at an indicative yield of 7.37%, and enter into Noble at an indicative yield of 9.86%
  • Shorting duration continued as a key theme among clients holding Frontier Communications as switching between the different Frontier lines dominated mid week trade. Investors de-risked by selling the June 2025 bond and moving into the shorter dated July 2021 and April 2020 lines. The trade remains active and is relatively easy to facilitate due to the large issue size of each of the Frontier bonds. Clients can expect to exit the June 2025 at an indicative yield of 16.46%, and move into the July 2021 and April 2020 at indicative yields of 15.43% and 11.75%, respectively. Note these yields are subject to change given the high level of volatility across the Frontier curve

Economic wrap

On Friday, headline US jobs data beat expectations, with Non-Farm Payrolls (NFP) printing at 228,000 (consensus 195,000). The unemployment rate was unchanged at 4.1%, as expected, the lowest rate since 2000. Disappointingly, average earnings growth was reported at just 2.5%, well below the 2.7% expected. This reinforces the Fed’s dilemma and will weigh on decisions to hike rates next year.

Other news

The Merredin bond is in demand with a shortage of stock resulting in some trades above $103.00. New buyers of the peaking powered station seem keen to be invested before the Christmas break.

Adani’s Abbot Point Terminal (AAPT) called its November 2018 bond with the exact pricing details yet to be announced. This is another positive for the 2020 maturity which continues to trade 0.60% wide of the Liberty 5.1% security. The two issuers are very different by nature with the Adani name subject to  negative media, but the bonds have the same credit rating and are only one month apart in maturity.

Cash Converters September 2018 bond continues to trade actively with buyers attracted to the 7% plus yield for less than twelve months and sellers looking to exit before maturity and any associated refinancing risk.

We continue to suggest clients consider shortening their exposure to Frontier and exiting Talen in conjunction with the recommendations of our third party research provider.

We understand AMP has called its December 2017 sub debt with investors to receive funds on or around 21 December. Clients who wish to exit early to reinvest proceeds before liquidity diminishes can sell today at around $100.00.


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