Wednesday 14 January 2015 by Lincoln Tragardh Legacy

From the Trading Desk (14/01/15)

This week: The RBA keeps rates on hold; US Fed members divided on when to increase rates; recent FIIG originated deals have mostly settled and secondary trading has commenced; CBL Corporation releases solid FY14 results; and QBE Capital Funding IV Limited GBP 7.50% 2041 is now available as a GBP DirectBond

Economic wrap

The focus last week was on the central banks, with the RBA surprising markets by keeping rates on hold and the US Federal Reserve releasing minutes from its last meeting.   

At its meeting last week, the RBA Board decided to leave the cash rate unchanged at 2.25%, surprising traders, but broadly meeting economists’ expectations. The press releaseExternal link - opens in a new window comments on a number of economic indicators, notably; declining commodity prices and terms of trade, below trend growth, higher unemployment that is expected to continue and inflation figures that are expected to be in line with the 2-3% target. The Board also stated that “a lower exchange rate is likely to be needed to achieve balanced growth in the economy.” The minutes finished by repeating that future rate cuts may be appropriate, however they said the case for such action would be assessed at future meetings.  

In the US, the Federal Reserve released minutes to its last meeting, which uncovered that there was some difference of opinion among the board members on whether economic data was strong enough to support increasing interest rates in June. Some members argued that the economic data and outlook supported raising rates in June, while others referenced lower energy prices and currency strength that would dampen inflation, as reasons for delaying rate rises.

With central banks moving interest rate markets, our domestic bond market sold-off on the RBA announcement to the tune of 10-15 basis points. Overall for the week our government bonds were higher in yield. The 5 year was higher by 10 basis points to finish at 1.91%, while the 10 year was 7 basis points higher to finishing at 2.37%. 

In currencies, the Australian dollar spiked by 1 cent against the US dollar with the surprise RBA announcement. Overall for the week, our dollar finished at 76.82 US cents, up from 76.17 US cents. Earlier this week however, weaker than expected Chinese trade numbers triggered a sell-off in our dollar, which is currently trading at around 76 US cents.

Looking ahead we have Australian employment figures out later in the week and inflation data out next week. Markets will be paying very close attention to these as gauges for what the RBA will do at its meeting next month.

Flows

Settlement on FIIG’s most recent new issue has now been finalised, so secondary trading is underway in all of our recent new issues from Dicker Data, McPhersons and Moneytech. Secondary performance has been strong across all lines with bids building, particularly in the McPhersons fixed rate tranche. Click hereExternal link - opens in a new window to see the Reuters article on these FIIG-led offerings.

Trading in GBP denominated bonds has picked up in the last couple of weeks, with activity in Macquarie and QBE lines. There has also been increasing interest in UK financial services group, Friends Life.

Fortescue (FMG) has been very volatile, reflecting volatility in iron prices. Ratings Agency, Standard & Poor’s, is also conducting a review on the sector and has put FMG on negative watch while it finalises this. FMG 8.250% 1 Nov 19 USD is currently offered indicatively at $77.50/79.50 buy/sell pricing (14.57% YTM).

CBL Corporation –strong FY14 results with a positive outlook   

CBL released its FY14 results to 31 December with operating profit up 92% on FY13.  CBL Insurance Ltd performed strongly with excellent insurance ratios headlined by a combined ratio of 83.8% for FY14 (86.0% in FY13). CBL has largely achieved the financial performance it forecast when it issued its bonds in April 2014. CBL is indicatively offered at $109.90 (4.47% yield to first call/ 5.46% yield to maturity).

New DirectBond – QBE Capital Funding IV Limited GBP 7.50% 2041

QBE Group ranks among the Top 25 global insurers and reinsurers worldwide as measured by net written premiums, with operations based primarily in North America, Europe, Australia/New Zealand, Latin America and the Asia-Pacific region. While QBE will likely continue to pursue acquisitions over the longer term, the group's executive management is focused on enhancing operational performance and efficiency of its existing operations, with the intent to bring greater unity and consistency worldwide in the near term.

The bond is offered indicatively at around 3.92% YTM. The factsheet for this bond can be viewed by clicking hereExternal link - opens in a new window (for wholesale investors only, login required).

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. For more information, please call your FIIG representative or our general line 1800 01 01 81.

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