Tuesday 11 September 2018 by Leigh Winton Week in review

From the trading desk

Bank lending tightens and wages rise putting pressure on household finances, Australian GDP growth on the upside, supply for Suncorp 2023c remains accessible, AAA rated Ale 2023 ILB bond still in supply, PJS 2030 IAB popular as longer dated inflation hedge

What’s trading

AUD & USD

  • The recently issued Suncorp 2023c subordinate floating rate note rated BBB+ began trading in the secondary market last week.  Since issuing in primary at a margin of +215, it has rallied in price with the margin tightening more than 25bps.  This Tier 2 is callable after five years and has a legal maturity in 2028, 14-16 years shorter than the maturity of some of its peers.  Supply remains accessible and is offered at a projected indicative yield to worst of 4.00%pa for wholesale investors only.  
  • Liberty Financial Ltd tapped its existing 2020 bond rated BBB- and raised an additional $100m of capital, increasing the issue size to $300m.  Although it is a shorter dated bond and we prefer to extend portfolio duration, it offers good relative value in the BBB rated space.  Investors are able to purchase this bond at an indicative yield to maturity of 4.32%pa for wholesale investors only.
  • Investors chasing high grade paper were in luck last week with the Ale 2023 inflation linked bond supply, which is rated AAA rated.  A limited amount of supply remains and is available at an indicative yield to maturity of 3.79%pa*.  Investors after a longer dated inflation hedge in portfolios have been purchasing the Plenary Justice SA Pty (PJS) indexed annuity bond (IAB) with a 2030 maturity.  On each coupon period IAB bonds pay an interest component along with a proportion of capital, derisking the bond.  The PJS 2030 IAB bond is available at an indicative yield to maturity of 4.63%pa* for wholesale investors only.      
    *assuming a 2.50% inflation target.

 Economic wrap

  • Australian GDP for 2Q18 was released last Wednesday, with headline annual growth of 3.4%, surprising on the upside. This number was helped by an upward revision of 0.5% from previous quarters but is not as good as it appeared.
  • Of particular concern is the rising pressure on household finances, with personal savings plummeting due to slow wage rises and tightening of bank lending. Household debt stress together with uncertain inflationary pressure and recent mortgage rate increases by three of the top four major banks reinforces our view that the RBA cash rate will remain on hold longer.

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