Tuesday 21 August 2018 by Leigh Winton Week in review

From the trading desk

This week, lower probability of an interest rate hike, Ausdrill and Barminco announce a potential merger, clients like the runway switch and RMBS to reduce duration.

What’s trading

AUD

  • Last week, the Firstmac 2015-1 C RMBS notes were a target for investors seeking to diversify and decrease AUD duration. Firstmac has a strong issuance history in the domestic securitisation market as both an issuer and a servicer and is rated as a ‘strong’ servicer by S&P. Since the notes were issued in May 2015, the underlying mortgage pool has performed in line with expectations. There have been no unreimbursed losses against the well-seasoned pool, and LVRs are low with over 68% of the pool possessing a loan to value ratio below 75%. The Firstmac 2015-1 C notes are currently offered at an indicative margin of 1M BBSW + 2.10%pa
  • We saw substantial demand for the Liberty Financial Pty Ltd 5.10% fixed rate notes, maturing on 9 April 2021 last week. Clients switched out of the Downer 2018, Liberty 2020 and Praeco nominal rate notes into the Liberty 2021 issue. They liked the Liberty 2021’s investment grade rating, familiar name, and indicative yield to maturity of 4.567%pa
  • A number of clients holding Virgin 8.25% fixed rate notes, maturing on 30 May 2023 switched into the shorter dated USD Virgin 7.87% fixed rate notes, maturing on 15 October 2021. The 2023 notes are offered at an indicative yield to worst of circa 7.10%pa, while the 2021 notes are offered at an indicative yield to worst of 7.60%pa. The 0.50% increase in annual return, coupled with the shorter duration (albeit in USD) made the trade very attractive
  • Clients positioning AUD portfolios toward the “lower for longer” interest rate theme were able to switch from the Sydney Airport Finance 2020 ILB into the longer dated 2030 issue. Institutional counterparties were able to offer significant liquidity on both sides of the switch, and clients that had been waiting for supply in the 2030 line were rewarded for their patience. Both lines are indexed against CPI, protecting investors’ capital against any decrease in real yields (nominal return less inflation). The Sydney Airport 2030 issue is currently offered at an indicative yield to maturity of CPI + 2.58%pa

Non AUD

  • Ausdrill and Barminco announced a potential merger during the week, resulting in the Barminco bond rising by USD4. We saw some investors, who bought Barminco at USD96 take some quick profits. However, the majority of the trading was done by investors looking to purchase with the expectation the bonds could rally further once the merger goes through. The bonds are available at an indicative YTW of 6.10%pa
  • Mallinckrodt has had a strong August, trading up 3.5% in capital value and coupled with the strong USD made an attractive exit level. We saw many investors look to take profits and move back to AUD investment grade names, as well as moving into higher rated USD names, in particular the “BBB-“ rated NCIG 4.4% 2027 bond, available at an indicative YTW of 5.10%p.a

Economic wrap

  • GDP and inflation forecasts revised lower along with benign job data on Thursday support the view of the RBA staying put for longer. The market estimates that there is a more than 50% chance the RBA will do nothing for the next 12 months. This supports our view of selectively buying longer dated AUD bonds
  • Trade talks between the US and China to resume this week, which could result in improved sentiment that is currently weighing on markets but we don’t see any agreement soon
  • The probability of rate hike over a 12-month period has decreased from 70% (when assessed in January this year) and now sits at or below 50% looking out to August next year

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