Monday 29 February 2016 by FIIG Securities FIIG Securities Trade opportunities

Resurgent AUD against the GBP provides opportunities


The AUD has been gaining ground against the GBP due to the uncertainty of it remaining in the European Union, making GBP denominated bonds more attractive. This note compares the relative value of five GBP bonds including a new bond just added to the DirectBond list

The cost to buy GBP has fallen relative to the AUD as shown in the graph below. However, the fundamentals of the UK economy remain relatively strong. A domestic market interest rate cut or confirmation that the UK remains in the EU could see the AUD fall relative to the GBP. We consider recent currency moves to be an opportunity to add GBP bonds to your portfolio.

GBP versus AUD graph
Source: FIIG Securities, Bloomberg

We compare five fixed rate GBP bonds in the relative value chart below. For a pure currency hedge, investors should opt for short dated, low risk bonds. In that way, investors protect against:

  • Price movements due to changes in perceived credit risk of the bond
  • Possible increases in interest rates, which could also impact the price of the bond

In that case, the old style Swiss Re hybrid would be the preferred security.

For those concerned that interest rates may decline further, locking in a fixed rate for longer would be a priority and the BHP Billiton bond is a stand out.

Old Mutual has an impressive yield to call but is considerably higher risk. This bond is complex with much of the earnings derived from significant exposure to the South African rand. We no longer provide credit research on the company but do have a factsheet - see the link below.

Yesterday, the Glencore GBP fixed rated bond maturing in February 2019 was added to the DirectBond list. With only three years until maturity and an attractive yield to maturity of 6.50%, we like the risk and return proposition.

GBP bonds relative value chart
Source: FIIG Securities, Bloomberg

Wholesale only fixed rate GBP portfolio

Company name Rating Maturity/call date Capital structure Yield to maturity/call Income (running yield) Minimum face value parcel
BHP Billiton Finance USD Ltd BBB+ 22 October 2022 Lower Tier 2 6.63% 6.55% GBP100,000
Glencore Finance (Europe) S.A. BBB- 27 February 2019 Senior debt 6.50% 6.50% GBP50,000
Old Mutual Plc Ba2* 24 March 2020 Hybrid 9.16% 7.01% GBP10,000
Rabobank Capital Funding Trust IV BBB- 31 December 2019 Tier 1 hybrid 4.25% 5.32% GBP100,000
Elm Bv (Swiss Rein Co) A 25 May 2019 Tier 1 hybrid 5.03% 6.07% GBP50,000

Source: FIIG Securities
Note: the above rates are indicative only accurate as at 29 February and are subject to change.
Bond are available to wholesale investors only.
*Not rated by S&P, Moody's rating included

For greater detail of the companies and bonds, please see links to research or factsheets below or contact your FIIG representative.

Note: A USD denominated Glencore bond maturing on 15 November 2021 has also been added to the DirectBond list. The minimum parcel is USD10,000. Current yield to maturity is 8.37% per annum.

Yields quoted are accurate as at 29 February 2016 but subject to change.