Tuesday 26 November 2013 by FIIG Research Legacy

From the Trading Desk (26/11/13)

Comments on yield/credit movements and trading activity. As expected, clients switching into new issues are creating plenty of opportunities in secondary markets.

Yield direction and volatility

Last week the US jobless claims figures came in strong yet again, showing a recovery in the US labour market and further supporting talk of an early taper. Yields marched higher in response, with the 5 year and 10 year benchmark swap rates rising in the range of 6 to 10 basis points (bps) to close the week at 3.82% and 4.63% respectively. Similarly yields on the Commonwealth government bonds rose over the week, around 9 bps in the 5 year and 13 bps in the 10 year. They closed the week at yields of 3.58% and 4.32% respectively.

Triggered by comments from RBA Governor Glenn Stephens regarding the potential for intervention in the currency markets, the Australian dollar fell over 2% to close the week at 0.9166 to the US dollar. A protracted fall in the currency is likely to meet headwinds though, as our interest rates are still among the highest in the developed world and central banks globally are increasing their holdings in Australian Dollars as part of their reserves.

Credit margins and trading activity

Trading margins on corporate issuance were mixed over the week. The Stockland November 2020 line traded 3bps tighter, whereas the trading margin on the Qantas April 2020 line widened 2bps by the end of the week.

The Stockland November 2020 line, which is often difficult to source, became available in volume at the tighter margin last week from an institutional seller. There was $1.5m traded as FIIG clients took advantage of the newfound supply.   

High activity among the Sydney Airport 2020 ILB continued last week as volume supply supported turnover of $5.5m for the period. The Sydney Airport 2030 ILB also saw decent activity as some clients took the opportunity to switch exposure from the 2030s into the shorted dated 2020 line.

Trading in the index annuity bond (IAB) space was dominated by the JEM NSW Schools 2035s as large size became available from the institutional sector. Immediate supply was exhausted with the offer yield likely to be lower going forward.

Plenty of other lines, including most of the FIIG earlier originated deals (PMP, Cash Converters, G8 Education, Mackay Sugar, and Silver Chef) were well traded across the week as clients switched in to the most current issue. Supply in many credits remains available with current indicative offers below (offer levels are current as at 26 November 2013).

Prices are accurate as at 26 November 2013 and subject to change
Source: FIIG Securities