The EU and Canada sign a free trade deal, Trump improves in the polls after FBI opens a new investigation into Clinton email usage and we add Geo Group to our DirectBond list
Economic Wrap
Central banks meet this week in Australia, USA, England and Japan. The US Fed is likely to further signal a rate hike in December, depending on upcoming data releases, and may make mention of how they expect rate rises to occur in 2017 and 2018.
US jobs numbers are released Friday, with nonfarm payroll forecasts between 160,000 to 180,000 jobs.
A rise in UK and EU bond yields has increased the number of securities available to be purchased under the European Central Bank (ECB)’s asset purchase program according to Bloomberg. Bloomberg cited a negative 0.4% rate as the threshold for ECB purchase, with the German 5 year note now being eligible at -0.39%.
The AUD is trading slightly higher today at 0.7602, as the market focuses its attention on the RBA meeting on Tuesday. Markets are pricing in less than a 10% chance of a rate cut after last week’s headline quarterly CPI number exceeded expectations at 0.7%. The increase in commodity prices is supporting the AUD and helping the Federal budget. An accompanying RBA statement tomorrow should continue to incorporate an easing bias by the central bank.
US government bonds are higher in yield over the week, with the 10 year bond currently at 1.84%. Other major economy government yields are higher too, with the exception of Japan which is unchanged. Current 10 year Japanese government bonds are trading at a negative 0.042% yield, 10 year German bunds are trading at positive 0.167% and 10 year UK government bonds (gilts) trading at 1.26%.
Other news:
- Stocks were broadly unchanged on Friday. In Europe, the Eurostoxx was down 0.19% and the FTSE 100 was up 0.14%. In the US, the Dow Jones and S&P500 were down 0.05% and 0.31% respectively
- US GDP was stronger than expected at 2.9%, which led to a rally in sentiment and stocks before the FBI’s further investigation into Clinton’s email was announced
- US consumer sentiment was lower in October at 87.2 (87.9 previously)
- Oil fell over 1% Friday, extending declines as the Organisation of Petroleum Exporting Countries (OPEC) members finished discussions without any news on production cuts or quotas
- China’s contribution to the global economy is expected to stay at between 25% and 30% according to Chi Fulun, director of the China Institute for Reform and Development
- The EU and Canada have signed the Comprehensive Economic and Trade Agreement (CETA) free trade bill, which aims to increase jobs, growth and trade for both areas. The agreement is seen to pave the way for an EU deal with the US being the Transatlantic Trade and Investment treaty (TTIP), prior to any Brexit treaty for the UK and the EU
Credit indices spreads are higher over the last week with the US Investment Grade Index (IG) finishing Friday up 4 basis points (bps) at 77.75 bps, whilst the US High Yield Index (HY) widened 19 bps on the week to finish Friday at 419.5 bps.
Domestically, the 10 year Australian government bonds last traded at 2.33%, 9 bps higher on the week. The Australian iTraxx is at 103.0 bps (or 1.03% for this index of 25 Australian Investment Grade names), unchanged overthe week.
ANZ bank announced the sale of Asian assets to Singapore’s DBS in a move widely seen as cementing their pullback from Asia. ANZ releases full year results on Thursday with a cash profit forecast of over 6 billion dollars.
Flows
While supply in the Genworth subordinated 2020 callable bond came to an end for the time being, another floating rate subordinated debt that made a welcome reappearance was the Auswide Bank lines, callable in 2019 and 2021. These tightly held bonds are some of the higher yielding options in the Tier 2 arena, and we currently have limited access to the 2019 call bond at around 4.80% on a projected yield to call basis.
In the USD space last week we added Geo Group 2023 USD to the DirectBond suite. Geo Group is a real estate investment trust (REIT) that manages, owns and leases correctional, detention and re entry facilities. The senior fixed rate bond is available in USD10,000 minimum size and is in good supply. The bond is callable at a premium from April 2018 until before the April 2021 call, then until maturity at par. At an indicative yield to maturity/worst* of just over 7% it has been met with demand, and has been an option for called CBL proceeds chasing high yield in USD.
*The yield to worst (YTW) is the lowest yield an investor can expect when investing in a callable bond.