Monday 27 August 2018 by Leigh Winton Week in review

From the trading desk

This week, markets appear steady despite Canberra turmoil, RBA & FOMC meetings mean imminent rate change unlikely, CCV investors switch to other FIIG originated bonds, Syd Airport 2030 inflation linked bond demand continues, investors continue to assess JC Penney holdings, USD Virgin 2021 popular

What’s trading

AUD & USD

  • With the upcoming maturity on Cash Converters (CCV), investors have been selling ahead of time and reinvesting funds. Most have been replacing CCV with another unrated high yielding FIIG originated bonds to maintain the overall portfolio yield.  Bonds currently on offer that have been popular include Elanor 2022, Impact 2021, Moneytech 2020c, NextGen 2023 and StockCo 2021c. CCV matures on September 19 2018 and it is recommended investors switch in advance to reduce reinvestment risk.
  • There is continued demand for the Syd Airport’s 2030 inflation linked bond.  On the back of the strong company results last week, the price has continued to appreciate, now yielding just above 5.00%pa, assuming a 2.50% inflation rate.  It is a tightly held bond and supply is difficult to access at times.  There is a limited amount currently available.
  • In the USD space investors continue to assess their holding of JC Penney after weak operating results and post ratings downgrades.  Investors have been moving into USD bonds they are more comfortable with such as Barminco 2022, rated B by S&P and B1 by Moody’s, which is available at an indicative yield to maturity of 6.10%pa. 
  • Another popular USD trade has been into the USD Virgin 2021 bond, rated B- by S&P and B3 by Moody’s, which offers good relative value compared to the AUD Virgin 2023 bond rated the same.  The 2023 bond offers an indicative yield to maturity of 7.12%pa, however for two years’ shorter in maturity the USD 2021 bond offers a yield 38bps higher at 7.50%pa.  Supply in the Virgin 2021 bond remains good and is available at an indicative yield to maturity of 7.54%pa.

 Economic wrap

  • The turmoil in Canberra has not yet appeared to impact markets, with the S&P ASX 200 closing 1.5% down compared to the start of the week and credit markets remaining broadly flat.
  • Although improbable, any call for general elections in Australia earlier than May 2019 would likely introduce near term uncertainty which could weigh on sentiment, especially given Labor’s proposed policies on negative gearing and franking credits.
  • Minutes released this week of the latest RBA and FOMC meetings support the view of no imminent rate change in Australia and a likely 25bps increase in the US in September 2018.

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