Tuesday 31 July 2018 by Leigh Winton Week in review

From the trading desk

US 10 year Treasury yields still under 3%, prices stabilise for favourite USD issues and we have supply in high yield names, Asciano 2025 attractive to investors looking to extend portfolio duration and yield, popularity for Virgin 2023 AUD continues, supply in FIIG originated bonds includes LUCAS, Praeco an attractive investment grade bond for retail investors

What’s trading

AUD

  • Clients continue to align their portfolios toward the “lower for longer” domestic interest rate expectation, extending the duration of their portfolios and yield. The Asciano 2025 fixed rate bond was popular, due to its longer maturity, investment grade issuer rating, and indicative yield to worst of 4.19%pa.

  • Demand for the Virgin 2023 AUD bond continued due to its high coupon and familiarity. It offers an indicative yield of 7.26% and matures in 2023. The bond price sustained its upward price momentum due to scarcity of supply in the institutional market.

  • FIIG originated bonds have been heavily traded throughout the week, and we see supply in the following names:

    • ELANOR-7.10%-17Oct22 at an indicative yield to worst (YTW) of 6.42%pa

    • LUCAS-8.00%-29Sep22 at an indicative YTW of 7.48%pa

    • NextGen-7.90%-22Jun23 at an indicative YTW of 7.47%pa

    • AAT-7.50%-13Nov20 at an indicative YTW of 4.44%pa

Non AUD

  • Australian issuers of USD bonds were the major focus last week as investors looked to capitalise on recent price weakness. Lack of demand from trading desks in Asia, spurred by negative sentiment around high yield securities, saw prices decline in some of our favourite USD issuers. Prices have since stabilised as buyers return to the market, however supply remains across a number of high yield issues. Clients wishing to add to their portfolio can expect to do so at the below indicative yields:

    • BARMINCO-6.625%-15May22-USD – YTW 7.37%pa, rated B

    • NCIG-12.5%-31Mar27c – USD – YTW 8.12%pa, rated B+

    • NCIGROUP-4.40%-29Sep27-USD – YTW 5.19%pa, rated BBB

    • QBE-5.875%-17Jun26c-USD – YTW 5.85%pa, rated BBB-

Economic wrap

US economic strength continued with 4.1% GDP for 2Q announced last Friday. Consumer spending, business investment and a decline in the trade deficit contributed to the result. However, most economists expect the rate to moderate  with the IMF, predicting 2.9% GDP for the calendar year 2018.

US Treasury yields held onto their weekly gains, closing at 2.95% in 10 year and the curve 2’s-10’s at 0.29%, with 2 year trading at 2.66%. We need strong US data to continue and political statements increasing trade tensions to stop, to enable 10 year yields to trade and hold above 3.00%.

Credit spreads were lower this week, with the Markit CDX North American Investment Grade Index down 3 basis points (bps) to 58.3bps and the equivalent high yield index down 7bps to 330.3bps.

The Australian Consumer Price Index remains weak, causing forecasters to push predictions of a rate rise to at least 2Q19 . Nevertheless, funding pressures remain. On the other hand, there is some relief for the Bank Bill Swap Rate with the one month index  at 1.87% compared to above 2.00% at end June.

The Bank of Japan meets this week with speculation the central bank is considering some flexibility in its yield curve control, keeping interest rates around 0%. Any change in policy will likely see further upward movement in bond yields and continued appreciation of the Yen.

The Federal Open Market Committee also meets this week, with no change in rates expected. US unemployment data will be released Friday with expectations of a 3.9% headline number, over 193,000 jobs in nonfarm payrolls and a 2.7% annual average hourly earnings increase number according to Bloomberg consensus.

Markets initially viewed the agreement between European Commission President Juncker and US President Trump to enter negotiations on trade positively. However, negativity and cynicism has grown with the realisation there is no detail to form an actual agreement.

Other news – AUD and USD high yield available

With the JEM Southbank Pty Ltd bond being called, investors will receive funds in the next few days. If you want to reinvest, talk to your RM sooner, rather than later, to ensure you can get set in your preferred security. If you want to maintain exposure to the issuer, they have a 2035 indexed annuity bond, available to all investors that pays a margin over Consumer Price Index above 2.50%. However, supply of the 2035 bond is limited.

For retail investors wanting investment grade bonds, the Praeco July 2020 callable bond, pays coupons over 7.00%pa and has a yield to that call date of close to 4.00%pa.

The Adani Abbot Point Terminal US dollar bond seems good value with a yield to maturity above 6.25%pa. Clients need a minimum face value of USD200,000 but the bond is trading at a discount to par around USD93.00, and the AUD 2020 bond is saleable around $102.50 with a yield of 5.60%pa. The USD bond is only available to wholesale investors, who also take on additional foreign currency risk.

Staying in US dollars, the BHP 6.75% October 2025 callable bond has seen good two way flows. It’s another bond with a USD200,000 face value. Buyers of this bond like the yield to call around 5.00%pa and the 6.75%pa coupons, but we feel there are better opportunities.

The QBE 5.875% June 2026 callable for example yields an extra 50bps and trades around par at USD100.15, whereas the BHP trades at around USD108.00. We also believe cyclically that BHP may be at or close to the top whereas the reverse is true for QBE.

 

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