Tuesday 10 July 2018 by Leigh Winton Week in review

From the trading desk

More increases expected in the Fed funds rate, investors sell USD bonds and bring funds home, NextDC issues a A$300m fixed and floating rate tranche, trades in the PMP 2019 callable bond, and RMBS a popular choice for wholesale investors. Research initiates it recommendation on the Virgin AUD 2023 bond

What’s trading

AUD

  • Inflation linked (ILBs) and indexed annuity bonds (IABs) were favourites last week, trading in high volumes across a number of bonds. We saw the majority buying into the longer dated IABs including the following names:
    • RWH-IAB-0%-30Jun33 at a real yield of CPI+2.50%pa
    • MPC-IAB-0%-31Dec33 at a real yield of CPI+2.54%pa
    • PJS-IAB-0%-15Jun30 at a real yield of CPI+2.45%pa
  • Virgin Australia continues its popularity, and its price has stabilised for the first time since it started trading. Investors are able to purchase the bond at an indicative yield to worst (YTW) of 7.44%pa. Supply in the bond is becoming scarce, and we expect it to move higher again once the easy supply dries up
  • Pioneer Credit Union recently issued a A$40m unrated issue. Supply was nonexistent but we were able to source some supply last week. Investors quickly took advantage of another high yield floating rate bond. We currently still have some supply available at an indicative YTW of 6.85%pa

Non AUD

Activity was muted in the USD space last week as liquidity dried up due to the Independence Day holiday. However, reduction of high yield USD exposure remained a key theme in the trades that did occur. The AUD’s recent downward slide has made shifting funds back into domestic investments an attractive trade for many clients. Selling was varied among industries with telecommunications provider Frontier Communications, pharmaceuticals manufacturer Mallinckrodt and offshore oil drilling company Noble Holding International all experiencing decent turnover across senior debt lines. Below is a selection of securities in these credits that are currently trading in decent volume. Liquidity is available for each during US trade at these indicative yields:

  • FRONTIER-11.00%-15Jun25c-USD – 16.23%pa
  • MALLINCKRODT-5.75%-01Aug22-USD – 9.34%pa
  • NOBLE-7.75%-15Jan24-USD – 9.36%pa

Economic wrap

US employment data was somewhat mixed on Friday, with a stronger non farm payrolls number up 213,000, subdued by a higher unemployment rate of 4.0% due to higher participation and a slightly weaker than expected annual average hourly earnings number at 2.7%.

German factory orders were stronger, rising 4.4% annualised  being the first increase for 2018. Hopefully this is the start of some stronger data for the Eurozone’s largest economy – the ECB is trying to bring an end to the Quantitative Easing (QE) stimulus by starting to reduce the monthly amount down to EUR15bn injected into the system from the end of September. 

As the ECB unwinding of QE continues, the reinvestment of proceeds is likely to be good for European government treasuries, with the exception of Germany as the ECB is already at its maximum holding for German Bunds.

The US yield curve continues to flatten with the spread between two year and 10 year US treasuries now less than 0.30%. Trade tensions continue to buoy demand for the longer maturity bonds with the short end rates rising in line with further expected increases in the Fed Funds rate. 

Other news – AUD and USD high yield available

NextDC, ASX listed data centre provider has announced a A$300m four year issue of both a fixed and floating rate tranche. These bonds are callable after two years and are unrated, available to wholesale investors only. The indicative pricing is 6% for the A$100m fixed rate tranche and BBSW +375bps for the A$200m floating rate tranche. We have seen good demand in the primary market and expect the bonds to trade at a premium (reduced yield) after issue.

PMP’s September 2019 security is finding buyers with a yield to maturity of circa 5.70%pa. The bond has approximately 14 months to run and has an Outperform recommendation from FIIG Research. The security is callable at $101.00 in September 2018 and March 2019, but with the security trading a little below $101.00, any early call would only improve the yield, albeit for a shorter term. Click here to view our latest research on PMP.

Readers will know we often discuss the Residential Mortgage Backed Securities (RMBS) market, as we favour wholesale investors using the ‘A’ rated securities to increase yield on the floating rate portion of their portfolio. Asmita Kulkarni (Director – Portfolio Strategy) has published a beginner’s guide to RMBS for those unfamiliar with the sector or those who want a refresher. Click here to view the article.

FIIG Research has initiated coverage with a recommendation on the AUD Virgin 8.25% 2023 bond. The bond and latest research is available for wholesale investors, click here.


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