Monday 06 August 2018 by Leigh Winton Week in review

From the trading desk

This week Australian retail sales beat expectations and 10 year government bonds up, FIIG new issue from Zenith Energy, ‘lower for longer’ trend sees clients switching from Downer 2022s to Aroundtown 2025s. Gold bonds - IAMGOLD, Kinross and Newcrest in focus. Adani USD 2022 trading wider than comparable NCIG bond at an indicative yield to worst of 6.39%pa                                     

What’s trading

AUD

  • Clients demanding floating rate exposure were rewarded, as we secured a line of “A” rated C notes, with a Weighted Average life (WAL) of 3.6 years. The notes are trading at a forecasted yield of 4.58%. As newly issued residential mortgage backed securities, the notes are compliant with APRA’s recently established macro prudential regulation on mortgage lending. Clients continue to extend their portfolio duration in lieu of the “lower for longer” theme. They sold Downer 2018/2022 notes to switch into the Aroundtown 2025 issue, which proved to be the most popular thematic trade. By switching from Downer 2022s to Aroundtown 2025s, clients were able to increase their indicative yield by 0.67%pa and their issuer credit rating from BBB to BBB+.
  • FIIG originated bonds are heavily traded, and we are seeing supply in the following names:
    • AAT-7.50%-13Nov20 at an indicative yield to worst of 4.805%pa
    • ELANOR-7.10%-17Oct22 at an indicative yield to worst of 6.475%pa
    • IMPACT-8.50%-12Feb21 at an indicative yield to worst of 7.091%pa
    • Moneytech-BBSW+4.65%-17Apr20c at an indicative margin of 3.192%pa

Non AUD

  • Gold producers prove popular as investors seek exposure to the more defensive asset class. FIIG has access to two investment grade bonds from issuers Kinross Gold and Newcrest mining, and as a high yield option, Canadian producer IAMGOLD Corp. Each is available in minimum parcels of $10,000 to wholesale investors. Indicative offer yields are shown below:
    • IAMGOLD-7.00%-15Apr25-USD - 5.89%pa rated B+
    • KCN-5.95%-15Mar2024-USD – 4.76%pa rated BBB-
    • NEWCREST-4.20%-1Oct22–USD – 3.99%pa rated BBB-
  • Defence was the theme of the week in USD. Adani Abbot Point Terminal’s senior secured December 2022 bond struck a chord with clients looking for investment grade assets. Adani is currently trading 115bps wider than the comparable NCIG Holdings investment grade issue and is also five years shorter. Adani is available in minimum parcels of USD200,000 at an indicative offer yield of 6.39%pa.

Economic wrap

US unemployment data met expectations with the headline unemployment rate at 3.90% and average hourly earnings coming in at +2.70% year on year. Althoug nonfarm payroll data was weaker at above 157,000 jobs versus a consensus number closer to above 190,000 jobs, the previous two months’ data showed upward revisions. This compensated for lower readings this month.

US Treasury yields were up during the week, breaching the 3% mark for the first time since May, and 20bps higher than last month. The curve, 2’s-10’s, also stabilised above 0.30% on news the US Treasury was increasing bond issuance by an extra USD1bn in the two, three and five year maturities for 3Q18.

The Australian 10 year government bonds followed a similar trend, leaving the AUD/USD hovering around the 0.74 mark. Credit markets are broadly stable, with Credit Default Swap indices in Australia and the US closing unchanged compared to the start of the week.

Australian retail sales beat expectations although lower property prices and higher fuel prices may still affect these numbers.

Last week was dominated by meetings from some of the global central banks, with no major surprise. First was the Bank of Japan, confirming no major change to its policies and leaving some flexibility in its bond purchase program. Second, the US Federal Open Market Committee left its rate unchanged as expected, but consensus remains that a rate hike in September is highly likely.

Finally, the Bank of England lifted its base rate by 25bps to 0.75%. Looking ahead, this week will be lighter on the macro economic data front, with earnings releases likely to dominate the headlines.

There will be continued uncertainty from the US - China trade war, with some speculation that President Trump’s proposed tariff on an additional USD200bn of goods might be lifted from 10% to 25%.

Other news – AUD and USD high yield available

FIIG arranged a new bond for Zenith Pacific Pty Ltd last week, being an AUD40m secured subordinated amortising note with a final maturity in August 2025. Zenith Pacific Pty Ltd is guaranteed by its parent Zenith Energy, a Perth based independent power producer listed on the ASX. The notes were well received by investors and are likely to trade at a premium when they are issued.

Axsesstoday released FY18 trading highlights with full results due in the next few weeks. The Axsess-BBSW+6.50% security has been trading around $102.90 with a yield to worst of 7.19%pa and October 2020 call date at par at $100.00. The bond is callable quarterly from October 2018 at $103.00 and quarterly from October 2019 at $101.50 and if called the yield will exceed the previously mentioned 7.19%pa.

Increased demand for the Sydney Airport 2030 inflation linked bond has seen the yield contract. It appears there are still many purchasers for the bond even at higher prices.

The BBB rated Newcastle Coal secured 2027 US dollar bond is appealing to buyers looking for investment grade product in foreign currency and a yield above 5.00%pa. Its yield is about 3.1% lower than the junior subordinated debt, NCIG Holdings bond, callable March 2027, but is five notches higher in S&P credit rating terms.

 

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