Yield direction and volatility
Following Scottish voters’ rejection for Independence from the United Kingdom, and the US Federal Reserve meeting in-line with market expectations, investors were less jittery over the week sending yields slightly higher. Scotland voted by a score of 55% versus 45% to stay as part of the UK, saving the currency and markets from any turmoil caused by its exit.
The Fed renewed its pledge to keep interest rates near zero for a “considerable time” after a two-day meeting. It announced a further $10b reduction to its bond purchases, on course to end the program next month. However, the Fed also raised their median estimates for the federal funds rate (which is he US equivalent of the RBA cash rate) as follows:
- End-2015 1.375% (up from a median estimate of 1.125% in June)
- End-2016 2.875% (up from 2.50% in June)
- End-2017 3.750%, being the first time it has put an estimate out for that date
These higher estimates contributed to the increase in US Treasury yields, particularly the short end of the curve.
These two big events of the week resulted in the 5 year and 10 year benchmark swap rates both up 4-6 basis points (bps) over the week, closing at 3.47% and 4.00% respectively. The 5 year and 10 year Commonwealth government yields were higher by 3-8 bps for the week, finishing at 3.11% and 3.73%. (For further information on recent yield curve movements please see “Changing yield curves are an opportunity to shift your fixed income strategy”).
New issuer – 360 Capital
FIIG’s most recent new issue, the 360 Capital September 2019 6.90% fixed rate bond, last week traded in the secondary market and was added to the DirectBonds list. The bond is available to wholesale clients only and in minimum parcel sizes of $10,000. FIIG has good access to supply of this bond which is indicatively offered at a yield to maturity of 6.72%.
Cash Converters International Limited available to retail
An earlier FIIG issue, the Cash Converters International Limited (CCV) September 2018 7.95% fixed rate bond, became available to retail investors last week on its one year anniversary since issuance. The bond had previously only been available to wholesale clients. It is available in minimum parcel sizes of $10,000. There has been good two-way flow, as supply has been provided from wholesale investors exiting the bond and retail clients taking advantage of their newfound access to the bond.
AUD heading lower?
Following last week’s article by Craig Swanger “Australian Dollar doldrums - how to use bonds to profit from a falling Aussie dollar and earn 3-4% p.a.” and further falls in the AUD/USD to below 90c, we saw a significant increase in USD bond activity. The Emeco March 2019 fixed coupon bond was easily the most traded with almost $2m in turnover. FIIG has access to a wide variety of USD denominated securities with inductive offer yields shown below:
- Emeco March 2019: 8.71%
- Fortescue April 2022: 5.64% (new DirectBond from last week)
- Newcrest October 2022: 4.95%
- Petrobras May 2023: 4.52% ( new DirectBond from last week)
- Telstra October 2021: 2.64%
- Westpac February 2018: 2.17%
Inflation Linked
The Sydney Airport 2020 and 2030 capital indexed bonds (CIB) again dominated trading among inflation linked assets last week. Availability of the 2020 bond prompted switches from the longer dated 2030 issue, subsequently leading to a backlog in offers of the 2030s once supply began to dwindle in the 2020s. Demand in the 2020s has been building steadily with offers now hard to come by. FIIG can however offer the Sydney Airport 2030 issue in volume at an indicative offer yield of 6.48%*.
Trading among inflation annuity bonds (IAB) has been quiet the last few weeks as investor attention focused toward the high yield sector. FIIG currently has access to decent size of two of our favourite IABs (indicative yields shows):
- JEM Southbank June 2035: 5.70%*
- MPC Funding December 2033: 5.55%*
Other Traded Names
FIIG originated issues drew the majority of investors attention last week as the CCV bond became eligible for purchase by retail investors. The move prompted turnover of over $3m and made CCV our most traded issue for the week, as wholesale sellers took advantage of strong retail demand. CCV is the fourth FIIG originated bond to become available for retail investors, joining the ranks of the Silver Chef, Mackay Sugar and G8 Education fixed coupon bonds.
In addition to the above, many of our most popular FIIG originated issues have become available in decent volume driven by recent new issuance (Coffey and 360 Capital). Typically the best time to pick up existing FIIG originated bonds is during the launch of a new issue and for a week or two following. Yields listed as indicative offers:
- Adani Abbot May 2020: 5.90%
- CBL April 2019: 6.60%
- G8 Education August 2019: 6.07%
- PMP October 2017: 6.52%
- Silver Chef September 2018: 6.44%
*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.