Yield direction and volatility
Yields dropped last week after weaker than expected employment was released for December in Australia with the number of people employed decreasing by 22,600. The market reacted accordingly with the 5 year and 10 year benchmark swap rates falling in the range of 7-13 basis points (bps) to end the week at 3.62% and 4.61% respectively. There was greater movement across Commonwealth government bond yields as the 5 year rate dropped 15bps to 3.34% by week’s end and the 10 year yield declined 12bps to 4.11%. Yields also decreased across corporate fixed rate bonds for the week.
This morning will see the release of inflation figures in the form of the Consumer Price Index (CPI). Average economist estimates are around 2.4%; however, it is worth noting that the TD Securities Inflation Gauge, released on Monday, was relatively strong at 2.7%, so it is possible that there is an upside surprise today.
Foreign currency (unhedged) bondholders celebrating
Investors who purchased foreign currency bonds on an unhedged basis at any time over the past two years (with a view that the Australian dollar would underperform) would be revelling in the currency’s weakness. Last week’s poor employment report gave the currency another nudge south, and the currency has now broken below 88 cents compared to the US dollar. While my own personal view is that this has further to go, it may be prudent for foreign currency bondholders to take some profits and repatriate the currency, particularly if today’s inflation figures are strong. As shown in Figure 1, The US Dollar, Euro, and British Pound have increased by 18% - 21% since the beginning of last year, far outpacing fixed income returns over the same timeframe.
Figure 1
Leighton six month bond attractive
In the past, I have mentioned the opportunity presented by short term bonds as alternatives to cash and term deposits. This is worth reiterating, as we currently have access to the Leighton fixed rate bond maturing on 28 July 2014 at a yield of 4.20%, which is 30bps better than the best six month term deposit on offer.
Other credit margins and trading activity
The Rabo December 2014 Floating Rate Note (FRN) traded 25bps tighter as its call date is now less than a year away and it has been well bid for in the institutional market.
In the inflation linked bond space the Sydney Airport Limited 2020 and 2030 lines proved to be popular over the week with $4m traded across each maturity. Supply has declined for the 2020 maturity, but the 2030 maturity remains in good supply.
Clients took advantage of the steady supply of the Melbourne Convention Centre (MPC Funding) index annuity bond (IAB) with $9m in turnover for that line alone for the week. There is still good access to both the 2025 and the 2033 maturities.
The week also saw a decent sized parcel of the JEM NSW Schools 2031 IAB line traded, with all outstanding demand filled. Supply at the moment is limited for this line; however, there is access to the 2035 line.
FIIG’s originated issues were all heavily traded last week with good two-way flow. The Silver Chef September 2018 line traded around 8 bps wider in spread, but this was offset by the reduction in benchmark rates, and the yield closed lower with bids outstripping supply. G8 Education August 2019, PMP October 2017, Payce December 2018, Cash Converters September 2018 and Silver Chef September 2018 traded a combined total of $9.5m over the week. Supply of Silver Chef has become difficult to source, but all other lines remain in good supply at the indicative yields:
- PMP October 2017 - 7.94%
- CCV September 2018 - 7.39%
- G8 August 2019 - 6.93%
- Payce December 2018 - 9.28%
- Mackay Sugar April 2018 - 6.62%
Notes:
Offer levels are indicative as at 20 January 2014 and subject to change based on demand and market movements.
Yields for floating rate notes are estimated as the sum of the swap rate to maturity / call and the trading margin.
Yields for capital indexed bonds and index annuity bonds are estimated as the real yield plus a 2.50% inflation assumption.