Wednesday 24 October 2018 by Jessica Rusit Sales commentary

From the trading desk

Negative geopolitical sentiment over-rode good US retails sales numbers. Investors continue to reduce risk preferring investment grade securities, select high yield USD bonds still sought after


  • Often in short supply, the Pacific National 2027 floating rate notes (FRN) became available last week from an off-shore seller.While for wholesale investors only, the bonds offer an attractive margin, and longer dated floating rate exposure which will benefit from any increase in interest rates.The bonds are offered at an indicative margin of BBSW +175 basis points (bps).
  • In USD, investors added the fixed rate Newcastle Coal Investment Group 12.5% 2027 bond to portfolios, despite its longer duration.Its attractive higher coupon rate provides a buffer against interest rate sensitivity.The bond, available to wholesale investors only, is available at an indicative yield to maturity of 8.43%pa.
  • With recent market volatility, investors have been adding more investment grade bonds to portfolios, such as the Sydney Airport 2030 inflation linked bonds.The bond has been a long term defensive favourite, offering inflation protection and a good relative value return. .Supply became available last week, although can be hard to source at times, and is offered to retail investors at an indicative yield to maturity of 5.11%pa (includes a 2.50% inflation assumption).

Economic wrap

  • Another week with negative sentiment around geopolitical risks, especially China and Saudi Arabia.
  • Positive US retail sales data for September were better than the headline number given lower petrol prices. This was followed by a strong unemployment rate in Australia, dropping to its lowest level since late 2011 – but underemployment remains high.
  • Although the strong job data print would be one of the factors contributing to a RBA decision to raise rates, the minutes of its last meeting released last Tuesday, also flagged the potential implications of continued availability of credit for Australian consumers and businesses. We remain of the view that a rate hike in Australia is unlikely until at least the latter part of 2019.
  • While the US economy continues to go from strength to strength (and the Federal Reserve has taken a more positive view of near term performance as highlighted in its recent minutes), its budget deficit continues to widen at an alarming pace and is expected to reach USD779bn in 2018, its highest level since 2012. What this will mean for US government treasury yields is uncertain as China, the largest foreign holder, has been reducing its holding since March this year. Who will step in to fill the gap as the US issues more debt? Only time will tell.