The RBA left the cash rate on hold at 2% last Tuesday. Credit spreads have widened following US unemployment data released for the US on Friday. And interest in foreign denominated bonds continue as the AUD remains above 70 cents to the US dollar
Economic Wrap
Credit indices’ spreads widened following the US unemployment data on Friday. The US Investment Grade Index (IG) finished Friday 5 basis points (bps) wider at 114.9 (+12 bps on the week) and the US High Yield Index (HY) widened 21 bps to 550 (+42 bps on the week). As a reminder, the IG index is comprised of the Credit Default Swaps of 125 equally weighted names whereas the HY is comprised of 100 non-investment grade names. Changes in them are reflected in the pricing of the underlying securities of varying credit quality.
Domestic interest rates were slightly lower last week, with the AUD 3 and 10 year swap rates at 2.07% and 2.70% respectively. The Australian iTraxx is around 151 bps (or 1.51%, which is +12 bps on the week for this index).
The US employment data had something for everyone on Friday with the headline number below 5% but the non-farm payrolls (NFP) number weaker than expectations. Markets focused on the average NFP numbers being above 200k monthly in 2015. Fed Chair, Janet Yellen appears before the House Financial Services Committee on Wednesday US time and she addresses the Senate Banking Committee on Thursday. Markets will be analysing her comments to try and decipher the timing and chances of a further Fed hike in March and the impact (for the Fed and its decision making) of recent turmoil in equity and commodity markets leading to fragility in financial markets.
US government bonds continue to yield below 2.00%, with the 10 year currently at 1.85%. This is reflective of demand for higher rated bonds.
The domestic cash rate was left unchanged at 2.00% last Tuesday, with some economists thinking there may be room for further cuts in 2016 from a weaker domestic economy. The RBA’s Statement on Monetary Policy later in the week confirmed this by expressing a clear easing bias, underlined by concerns around financial market turbulence impacting demand and whether labour market improvements will continue.
Flows
With the AUD holding above 70 cents, client buying in USD denominated bonds continued. With the glut in oil, clients are looking to credits that stand to benefit from falling oil prices. As a result we had a lot of buying in the Virgin 8.5% 2019 USD bond which we can continue to source at an indicative yield of 8%.
In FIIG deals, the recent Ansett Aviation bond attracted buying interest after Jetstar confirmed it would renew its contract for pilot training services with Ansett. We are awaiting final details of the contract, however with a key risk largely mitigated, buyers took advantage of supply at an attractive level. We remain well placed to offer bonds at an indicative yield of 7.27% for the 2020 maturity.
Residential Mortgage Back Securities (RMBS) also attracted some interest last week. We had a number of offers that clients took advantage of, with attractive spreads offered for relatively short dated lines. We expect to have several more offers over the next couple of weeks – please contact your dealer for further information.