Tuesday 13 February 2018 by Leigh Winton Week in review

From the trading desk

High yield bond prices rise after global equity volatility, Aussie unemployment data due Thursday, demand for USD names including JC Penny, Rackspace and Barminco; Asciano 2027 supply exhausted and investors switch out of Downer 2018 to Sydney Airport ILBs and Adani 2020 fixed rate

What’s trading

AUD

  • As markets adjust to expectations of rising interest rates, clients repositioned their portfolios by adding more floating rate note (FRN) exposure. The usually hard to source Asciano FRN May 2027 bond became available in limited size, which was snapped up immediately. The bond offers an indicative projected yield to maturity of 4.75%. We no longer have any suppy
  • There was two way flow in the Sydney Airport inflation linked November 2020 and 2030 bonds last week.  Some clients shortened duration and moved in to the shorter dated 2020 bonds, while others held the view that inflation will be benign in the short term and wanted longer dated protection. Both the 2020 and 2030 bonds remain available, offering an indicative real yield to maturity of 2.19% and 2.86%, respectively
  • With less than a year until maturity of the Downer November 2018 fixed rate bonds, clients have been selling now –  above the redemption price of par –  and switching in to other bonds.  This also avoids the flood of capital searching for a new home come November. Clients have been purchasing the previously mentioned Sydney Airport inflation linked bonds as well as Adani Abbot May 2020 fixed rate bond

 Non AUD

  • Trading in the USD space was muted last week following the stock market sell off. Mallinckrodt International Finance (MNK) senior debt remained a focus for investors after the weaker trading sessions translated into higher yields for both the August 2022 and October 2023 bonds. Both lines are still in good supply at indicative yields of 8.30% and 9.08%, respectively
  • Focus was mixed elsewhere in the USD space with department store retailer JC Penny, data services provider RackSpace Hosting, food and beverage company Dean Foods, and mining services provider Barminco all in demand. All four bonds are still available in good supply at inductive yields:
    • Dean Foods 6.50% March 2023 – 6.13%
    • JC Penny 5.875% June 2023 – 6.22%
    • RackSpace 8.625% November 2024 – 6.93%
    • BARMINCO-6.625%-15May22-USD – 6.43%

Economic wrap

Data took a backseat last week, as investors were more focused on watching their equity portfolios take a beating. The big data point this week is US CPI – core is expected at 1.7% and headline at 1.9%; a higher than expected number has the potential to again set off an already jittery market.

Locally, unemployment figures are released Thursday with the headline rate forecast unchanged at 5.5%, and the jobs component to be +15,000 according to Bloomberg.

Other news

The theme of increased volatility in global markets has led to a sell off in high yield bonds and a widening in spreads, evidenced by the relevant indices for investment grade and high yield. This may be an opportunity for clients to purchase at prices not previously available.

JC Penney (BB-) now yields above 6.2% in USD and for those wanting an USD investment grade option, we have some CIMIC Finance USA (BBB) November 2022’s available at 3.91%. The company was formerly known as Leighton Finance (USA) and the bond is senior unsecured.

Stronger US data is likely to continue and we expect 10 year US yields to trade at 3.00% before the end of March, compared to 2.85% today. Consequently, we continue to recommend that investors shorten their maturities and duration in US bonds. CFIIG will continue to bring US bonds to clients with maturities of less than 10 years.

Our offshore research contributor has a ‘sell’ recommendation on the Genworth USA business, noting it is under pressure across multiple fronts and that it may need a secured loan to help repay US$600 million in senior debt due in May 2018. We suggest holders of the 7.625% September 2021 security sell and talk to their relationship manager for performance calculation and reinvestment options.

However, let’s not get too negative on the Genworth AUD business and the July 2020 Tier 2 callable security. The AUD business is APRA regulated, and the security is A- rated, albeit on negative watch. Although Genworth has experienced customer erosion, this has led to smaller capital requirements, much in the same way that a reserve asset ratio operates.

For Australian dollar portfolios, we continue to endorse a broadly neutral composition. Our current target bands are 20-50% in fixed rate bonds, 25-50% in floating rate bonds and 20-40% in inflation linked bonds.

We appreciate that investors may feel they are experiencing coupon erosion by moving out of fixed. However in time, we expect AUD rates to be dragged higher by increased US rates – even though we accept that Australia does have under employment and other related capacity issues which make it unlikely for there to be any rate change in Australia for the next six months.


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