Last week there was substantial buying in the Glencore 2019 fixed rate AUD bond, which is a recent addition to our DirectBond suite. Reporting season continued with a variety of company results reported. This week, markets expect the RBA to hold rates at 2.00%
Economic Wrap
There are an increasing number of economic forecasters calling for a rate cut in Australia by mid 2016.The RBA meets tomorrow and is expected to leave the cash rate unchanged at 2.00% but the combination of low inflation, low wage growth and mixed data is augmenting the chances of a rate cut.
There has been a huge variety of corporate results during February. Look no further than the difference in performance of Harvey Norman, Woolworths and Dick Smith to see how individual companies are faring in the current climate.
Naturally, Qantas performed well with lower oil prices and BHP slashed its dividend. It’s a good reminder that often dividend cuts are positive news for bondholders. With less money paid out to shareholders, the organisation’s balance sheet strength increases (through or) via more funds available to pay interest.
US government bonds continue to hover around 1.75%. Although we had some stronger US data last week, there needs to be further strong data and further declining credit spreads to push yields back above 2.00%
Overseas news:
- US data for spending and GDP was generally stronger than expected, with GDP, personal spending and PCE all above forecasts
- G20 meeting ended in Asia with little in the way of new statements on the global economy, cooperation and foreign exchange
- Hilary Clinton had a big win over Bernie Sanders in South Carolina, in the lead up to Super Tuesday this week
- Early Brexit opinion polls show an evenly split electorate albeit with relatively small sample sizes
- Crown Casino results from its Asian operations continue to fuel speculation of a troubled China (and the flow on effects of this on Australia), but we note the difficulty of understanding how this vast economy is tracking, what a reasonable growth number is and how the Chinese Authorities are monitoring and stimulating the economy
Credit indices spreads moved only slightly on Friday. The US Investment Grade Index* (IG) finished Friday down 2 basis points at 118.0 (and narrowing 8bps on the week) and the US High Yield Index (HY) was down 6bps on the day at 532.5 (and narrowed 19bps on the week).
Domestic market
Domestic interest rates are 5-6bps lower over the last week, with the AUD 3 and 10 year swap rates currently at 2.01% and 2.55% respectively. The Australian iTraxx is around 158.5bps. It did not narrow as much as its US peers, being 3.0bps lower on Friday but 1.4bps wider on the week (Friday to Friday). It feels like this is a result of the differing economic positions between Australia and the US with the improving US data.
Flows
The main trade over the last week was buying in the Glencore 2019 fixed rate AUD bond, which is a recent addition to our DirectBond suite. With credit spreads tightening over the week and cheaper supply in the Glencore exhausted, we are able to offer bonds at an indicative yield of 8.30%.
Following on from the buying activity in Glencore’s AUD bond, we have today also added two foreign currency Glencore lines to our DirectBond list. These are the 2019 GBP and 2021 USD lines (click on the names for the bond factsheets). Both have larger issues sizes and supply is expected to be more liquid than the AUD lines.
In other investment grade trading, we also had buyers of the Praeco 2020 call fixed rate bond. Available in small parcel sizes and with a yield upwards of 5% we saw renewed interest, particularly among retail investors.
BHP released results last week and announced reduced dividends – details here. With results showing a focus on protecting the company’s balance sheet, we had some further interest in BHP across its USD, EUR and GBP lines.
In FIIG deals we had a number of results out, notably from McPherson’s – details here. Importantly, in the release McPherson’s announced plans to divest its housewares business and use the proceeds to reduce debt by around $20m. This attracted buying across the company’s two outstanding bonds, the 2019 floating rate note and the 2021 fixed rate bond. These are indicatively offered at yields of 7.50% and 7.94% respectively, with supply currently better in the fixed line.
*Note 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 prices of securities of varying credit quality.