Monday 07 March 2016 by Week in review

Trading Desk – Qantas now rated investment grade by two agencies and surprise 2 notch downgrade of BHP

Last week, higher than expected US payroll data was released and the Dow Jones finished above 17,000 for the first time since January. Our interest rates were 15 basis points higher over the week and BHP was downgraded by Moody’s. Whereas, the agency upgraded Qantas to investment grade and as a result, we saw sustained institutional buying

Economic Wrap

Higher than expected US payroll data enabled stocks and credit to continue to rally on Friday. The data was somewhat mixed, with the unemployment rate unchanged and average hourly earnings down 0.1%. Markets however chose to focus on the large addition to non-farm payrolls which increased by 242,000 in February, up from 172,000 in previous month. The Dow Jones finished above 17,000 for the first time since early January, although the broader S&P 500 did not quite manage to close above 2,000. 

The European Central bank (ECB) meets on Thursday with potential further cuts to deposit rates, which would put them further into negative territory.

Brexit opinions continue to rank large in the UK media as the vote approaches on 23 June. The Director-General of the British Chamber of Commerce has been suspended after voicing his support of Brexit which is not necessarily in line with the Chamber’s official view.

10 year US government bonds sold off to yield around 1.88%.  It feels like another strong week for credit and if so, would see these yields rise above 2.00%.

Other news:

  • People’s bank of China (PBOC) lowered the reserve requirement for banks to 17%
  • Super Tuesday finished with Hilary Clinton and Donald Trump becoming the favourites to receive the Democrat and Republican nominations
  • Inflation in the Euro zone (as measured by Consumer prices) turned negative, decreasing 0.2% YoY

Credit spreads moved a lot over the last week as the US Investment Grade Index (IG) finished Friday down 2.5 basis points (bps) at 94.5 (narrowing a significant 16bps on the week) and the US High Yield Index (HY) was down 9bps on the day at 472.5 (narrowing 60bps on the week).

Domestic market

Domestic interest rates are 15bps higher over the last week, with the AUD 3 and 10 year swap rates currently at 2.15% and 2.71% respectively. The Australian iTraxx is around 144.0 basis points or 1.44%, for this index of 25 Australian Investment Grade names. Our iTraxx narrowed throughout the week after the RBA left rates on hold at 2.0% on Tuesday.    

Locally, the largest credit news was Moody’s downgrading BHP by two notches, noting the company’s deterioration in earnings and cashflow. Moody’s is also reviewing other local firms like Adani Abbot and DBCT during March. Although local data remains mixed, for example the disappointing building approvals of last week, we suspect the stronger US data is enabling stronger confidence globally which has fed through to the higher domestic Swap Rates and lower credit spreads.

Crude oil has also helped fuel the better sentiment, with the first NYMEX Futures Price at $36.36 which is close to 10% up on the previous week. 


Buying continued in the Glencore 2019 fixed coupon bond last week. The company released its FY15 results, which were in line with our expectations and consistent with the company’s debt reduction strategy. As a result, the bonds were significantly bid up in the street and we can continue to offer the bonds at an indicative yield of 7.71%.

In non AUD trading, Newcrest and Virgin attracted most activity. With gold rallying, the bid lifted on Newcrest and we saw sellers across the USD curve. On the other side of it, we saw volume buying in the Virgin 2019 USD bond, with supply available around the 8% mark.

Moody’s announced a credit rating upgrade on Qantas last week, which prompted investors to take profits. Details on the upgrade can be found here. With the bond now rated investment-grade by both Moody’s and S&P, we saw sustained institutional buying. Many of our investors, having bought the bonds when the company was rated sub investment grade, have taken the upgrade as an opportunity to realise gains and rebalance their holdings back into the higher yield space, particularly in FIIG-originated bonds. 

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.