Yield direction and volatility
Concerns of a global economic slowdown sent markets across the board in to a tailspin last week, spurred on by weak US data. Retail sales in the US dropped 0.3% for September, which was more than forecast. Equity markets experienced choppy intraday moves, with commodities reaching a five-year low and US Treasury trading volumes at their highest on record. By week’s close markets had recovered from their earlier moves, with bonds reversing their rally to close lower.
In response to speculation the sell-off was overdone, the 5 and 10 year benchmark swap rates both closed relatively flat at 3.20% and 3.69% respectively after hitting lows on Thursday of 3.05% and 3.52% respectively. Similarly, the Aussie iTraxx index experienced a very volatile week, opening at 100.50 and rallying to a high of 108 before closing Friday back down at 104.255. This contrasts with a 52-week low of 78.555 as recently as 08/09/2014.
While the start and end readings for yields were not significantly different, the volatility in many markets was extreme. This was highlighted by a massive intraday fall in the yield of ten year US Treasuries on Wednesday said to be an eight standard deviation event. Moreover, it was on the highest volume ever recorded.
Australian Consumer Price Index (CPI) is released today (Wednesday) with economists expecting a 0.10% decrease for the quarter.
Inflation linked
Activity among inflation linked assets stole the spotlight again last week as continued supply of the Sydney Airport (SydAir) November 2030 capital indexed bond (CIB) spurred two-way trade flow in a number of our favourite names. The Envestra August 2025 and SydAir November 2020 CIBs were the most popular targets for clients switching into the higher yielding SydAir 2030 issue. The resulting supply in the Envestra and the SydAir 2020’s was quickly spoken for. The SydAir 2030 however is still in excellent supply at an indicative offer yield of 6.34%*.
Taking a backseat to the CIBs in recent weeks, FIIG still sees value in a number of available indexed annuity bonds (IAB). Late last week a large parcel of Novacare April 2033 became available via an institutional seller, marking the first time the security has traded in size since February. FIIG currently has an excellent line on the Novacare, as well as a number of our other favourite IAB listed below:
- Australian National University Oct 2029: 4.80%*
- JEM (Southbank TAFE) Jun 2035: 5.65%*
- MPC Funding Dec 2033: 5.43%*
- Novacare Apr 2033: 5.45%*
USD and other traded names
Recently added to our DirectBonds list, Kinross Gold Corp March 2024 fixed coupon bond (FCB) traded well among other USD issues last week, as clients looked to profit from the downward trend in the Aussie dollar. Recording $1.2m in turnover, the Kinross was second in popularity only to the Emeco March 2019 USD FCB, whose high semi-annual coupon of 9.875% proved an attractive alternative and saw a total of $6.4m of turnover. Indicative pricing for a selection of available USD issues are below:
- Emeco Mar 2019: 10.09%
- Kinross Mar 2024: 5.50%
- Newcrest Oct 2022: 4.95%
FIIG originated high yield issues have been in fairly consistent supply over the last few weeks, with last week being no exception. Good two-way flow has seen supply and demand fluctuate across the majority of our issues. Some currently available bonds are listed below:
- 360 Capital Sept 2019: 6.72%
- G8 Education Mar 2018: 5.61%
- Plenary Jun 2021: 6.54%
- PMP Oct 2017: 6.55%
- SilverChef Sept 2018: 6.49%
360 Capital relative value
It is worth noting that for mainly technical reasons (i.e. size of issue – Coffey $40m and 360 Capital $75m - and resultant demand and supply) that since the Coffey and 360 Capital bonds were launched one week apart in mid September, the trading margin on Coffey has rallied from 4.65% at issue to circa 3.80% while the 360 Capital trading margin has risen from around 3.50% to 3.55%. With the differential now at just circa 25bps, 360 Capital is seen as a standout on a relative value basis given the significantly lower gearing and risk profile of the underlying business compared with Coffey.
*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.
All prices are accurate as at 21 October 2014.