Inflation linked bonds took centre stage last week with Australia’s CPI release and with the AUD trading up over the 70 cent mark, clients continued to buy non-AUD bonds, in particular BHP and BlueScope
Economic Wrap
Oil rallied to three week highs last week amid hopes that Russia and OPEC, led by Saudi Arabia, will be able to agree to production cuts of up to 5% at a meeting this month. Saudi Arabia has made it clear over the past few months that it would only be willing to cut production if other oil producing nations such as Russia, Iraq, and Iran agreed to do the same. Additionally, analysts have indicated that if both Saudi Arabia and Russia cut their production by 5%, that that would be roughly equivalent to the current oversupply globally. Markets reacted very positively, with Brent Crude Oil finishing 9% higher over the week at USD35.99, after having hit 12 year lows the week prior.
In the US, the Federal Open Market Committee met on Wednesday and met market expectations by leaving their domestic funds rate unchanged at 0.25%-0.50%. Whilst this was in line with market expectations, the statement that accompanied the announcement was expected to be somewhat more dovish, so risk assets sold off when the FOMC left their tightening bias unaltered. The Dow, S&P 500 and NASDAQ closed -1.4%, -0.5% and -2.2% on the day of the FOMC decision.
We also had some weak US GDP data released on Friday night, with 4Q15 growth coming in at an annualised rate of 0.7%, 0.1% under expectations and considerably short of the 2.0% 3Q15 figure.
Domestically, CPI printed close to expectations at 1.7% for the year, with the trimmed mean figure of 2.1%. In the absence of an unexpectedly low figure, markets have virtually discounted any chance of a RBA rate cut at this week’s meeting. The RBA is now expected to await further data before taking any policy action, given the uncertain impact that the heightened volatility and weakness in commodities and currencies can have on inflation.
US markets took the lead in interest rate markets, with the FOMC and weak GDP figures in focus. Safe haven US treasuries rallied considerably, with yields in the three and 10 year finishing the week down 15 and 13 basis points (bps) to 0.97% & 1.92% respectively. Australian yields followed suit, with our three and 10 year government bonds seven and 12bps lower at 1.88% and 2.64% respectively. Credit spreads were relatively stable and sought some relief from the recovery in oil. The Australian iTraxx index closed the week about 3bps tighter at 140.75bps. The AUD rallied slightly to finish the week worth 0.9 cents more, at 0.7084 USD.
Flows
With the AUD trading over the 70 cent mark, clients continued to buy non-AUD bonds, in particular BHP and BlueScope. Other USD bonds that have become popular again were Newcrest and Fortescue Metals. Clients were purchasing Newcrest 41s as a safe-haven gold hedge with the volatile commodity markets of late. Last week FMG released production guidance which came in stronger than expected and there was also talk that there could be a further bond buy-back.
Inflation linked bonds took centre stage last week with Australia’s CPI release, in particular the Sydney Airport 2020 and 2030 bond. Clients were purchasing an inflation hedge in their portfolios, with the Sydney Airport lines available at 5.31% and 6.02% respectively (assuming 2.5% inflation).
Clients took advantage of Payce Limited’s buy-back, using it as an opportunity to switch in to more recently originated FIIG deals. Payce had come to market with a strong bid, which created an opportunity for clients to book profits and move in to other high yield bonds.