Two regional Italian banks being bailed out, margins on shorter dated Tier 2 bonds continued to tighten and we add the Hertz senior secured June 2022 bond to our DirectBonds list
What’s trading
AUD
- The margin on shorter dated Tier 2 bonds continued to tighten and become more expensive over the week. Clients looked to take profit, exiting these positions and move in to bonds that offer a higher yield while maintaining investment grade exposure. One example was the Liberty Financial June 2020 fixed rate bond, which clients targeted after exiting positions in subordinated bank floating rate notes such as AAI November 2020 and Bendigo & Adelaide Bank January 2019. The Liberty fixed rate bond is available at an indicative yield to maturity of 4.50%
- As low inflation is expected in the short term, clients repositioned their portfolios to include longer dated inflation linked bonds (ILBs). Clients sold their shorter date Sydney Airport 2020 ILBs and purchased the longer dated Sydney Airport 2030 – which remains well bid for with strong demand and limited supply
- With the addition of the shorter dated Hertz 2022 USD fixed rate bond to our DirectBonds list, clients have been switching out of existing AUD holdings, freeing up stock that has been previously tightly held. The Adani Abbot May 2020 fixed rate bond became available again, and is offered at an indicative yield to maturity of 6.71%. Another bond is the CML May 2020 callable floating rate note at a projected indicative yield to call of 5.11%
Non AUD
- Demand for USD high yield continued last week following the addition of the new Hertz 7.625% June 2022 bond to our DirectBonds list. Clients were able to enter Hertz at around par. Further, trades out of longer dated issues like the TransAlta 2040 and the Navient 2033 allowed clients to shorten duration and pick up yield
- Continuing the high yield theme, Rackspace and Transocean remained popular last week with the shortening of duration again a major driver of demand. Supply remains good in both lines. Clients can expect indicative offer yields of 6.50% and 8.21% respectively
Economic wrap
- Moody’s followed S&P’s decision to downgrade Australian banks, which caused minor widening in credit spreads for affected institutions
- The South Australian government announced a 0.015% bank levy to complement the 0.06% proposed by the Federal Government, as part of a budget that was otherwise quite well received
- Two regional Italian banks are receiving bailouts with a reported initial cost to taxpayers of EUR5.2bn
- US labour market data last week was broadly in line with expectations with both initial and continuing jobless claims also flat on the prior period. New and existing home sales were slightly stronger
- From next May China will be included in global MSCI indices, in what is being taken by some to be a step toward market liberalisation
Other news
Residential property prices in Sydney and Melbourne continued their march forward after a brief hiatus in May. Both cities rose by 1.7% in June to date, reversing last month’s fall. Auction clearance rates that appear to have bottomed out above long term averages will be closely monitored by the RBA. In more accurate but much delayed ABS home price data, apartment prices fell in Melbourne in the March quarter this year, confirming oversupply has hit Melbourne first.
The minutes from the RBA’s June meeting show their concerns about rising underemployment, weak wages growth, and household debt on one hand, but also the ongoing threat of a housing market bubble destabilising the economy.
Oil prices continued to fall last week, closing at $43.17 (West Texas) on Friday. While oil will be volatile in the near term, it is the long term price that drives economic growth and investment market returns. Longer term, the supply outlook looks weak. Demand for oil will no doubt fall over the next 20 years as technology improves for alternatives, but in the next decade demand will remain near current levels or higher. Supply is currently rising from the Americas – but not elsewhere – and if investment in new supply doesn’t pick up in the US, supply will struggle to keep up with demand.