In the US last week, inflation data was released as well as average wage data which rose. Australia followed a similar plot, with domestic wages growing by 0.6%. With near term central bank rate moves in the mind of investors, we are seeing bigger moves in the short end of the yield curve, which flattened over the week. In trading, the Genworth subordinated bond was popular and two way flow in Qantas bonds
Economic Wrap
In the US last week, inflation data came out broadly in line with both expectations and the previous month’s figures. Core prices rose by 0.2% in October to be 1.9% higher year-on-year. Average wages also rose 2.1% year-on-year, slightly weaker than the 2.3% in the prior month.
While inflation data didn’t make any meaningful impact on markets or expectations of an impending Federal Reserve rate hike, we did see the Fed release the minutes from its October meeting. In the minutes, there was a focus on a possible December interest rate hike and most members felt that economic conditions would support a tightening of monetary policy at that time. It was noted however that international economic and financial developments could potentially disrupt plans to increase rates.
In Australia we followed a similar plot, with domestic wage data being released. Wages grew by 0.6% in the third quarter or 2.3% year-on-year. While in line with expectations this was also the lowest reading since the series began and a contributor to soft CPI. The RBA also release minutes to its meeting this month, which reiterated what we saw in the Statement on Monetary Policy and highlights an easing bias that is centred on weak inflation pressures.
With near term US central bank rate moves in the mind of investors, the short end of the yield curve flattened over the week. Our three year Australian Government bond yield rose by 7bps to 2.13%, while the 10 year rose by 5bps to finish the week at 2.90%. The Australian dollar also finished higher, opening at 71.26 US cents and finishing the week worth 72.39 US cents. Credit spreads were a couple of basis points wider over the week but managed to finish relatively unchanged at 119.75bps.
Flows
Last week saw good two way flow in the Qantas bonds after Standard & Poor’s upgraded its credit rating for the airline to investment grade. Existing holders took advantage of the news to take profit and switch into other bonds, while new buyers came along wanting to increase their portfolio’s weighting in investment grade bonds. Supply remains good in all three Qantas bonds - 2020, 2021 and 2022.
The Genworth 2020 first call Tier 2 that was recently added to the DirectBond suite, was well traded over the week. Clients who held the shorter dated Genworth with a 2016 first call, switched into the longer dated bond to pick up margin and lengthen tenure. This opportunistic switch worked well, given the shorter dated line is not typically as well bid by the institutional market. Other clients purchased the bond on an outright basis, as an attractive investment grade floating rate note exposure with a generous margin.