All eyes this week will be on the US, where the Federal Reserve will meet to discuss the future direction of US rates. At home, domestic interest rates increased 6-8 basis points this week over the previous week, while iron ore and crude oil continued to rally, driving the Australian dollar over 75 US cents. These two factors caused US dollar denominated Fortescue Metals bonds to rally, with many investors selling to buy other USD names
Economic Wrap
Last week, US stocks had their strongest close of 2016 on Friday as the Dow Jones Index closed above 17200 and the broader S&P 500 above 2000.
US government bonds sold off with 10 year treasuries finishing the week 10bps higher at 1.98%.
This week, The Federal Open Market Committee (FOMC) meets on Tuesday and Wednesday, and the Bank of Japan and the Bank of England also meet. The Federal Reserve statement will be closely watched to try and understand why the markets are pricing in only one more rate hike despite the Fed earlier forecasting three more rate hikes in 2016.
Brexit news in the media continues with both the Queen and the Bank of England confirming their neutrality. The absence of real information on the impact of ‘staying in’ versus ‘BREXIT’ is making it harder for the electorate to understand what they are voting for.
Other news:
- China data for Industrial Production and Retail Sales were weaker than expected at 5.4% and 10.2% respectively
- The European Central Bank announced expanded stimulus for the Eurozone via a lower deposit rate and an increased asset purchase program of EUR80bn a month
- The Reserve Bank of New Zealand cut its cash rate to 2.25% which is a new low. The Australian dollar is at its highest rate versus the NZD in approximately six months
Credit indices spreads moved lower again over the last week as the US Investment Grade Index (IG) finished Friday down 8 basis points at 83 (narrowing 11.5bps on the week) and the US High Yield Index (HY) was down 26.5bps on the day at 436.5bps (narrowing 36bps on the week).
Domestic market
Domestic interest rates are 6-8 basis points higher over the last week, with the AUD 3 and 10 year swap rates currently at 2.23% and 2.77% respectively. The Australian iTraxx is around 132.0 basis points (or 1.32%, for this index of 25 Australian Investment Grade names). Our iTraxx narrowed throughout the week in line with the unwinding of ‘Risk-Off’ positions that has been occurring over the last couple of weeks.
Iron ore and Crude Oil continue to rally with Iron Ore trading above USD60 at one stage last week (for the 62% FE content product) , and the Crude WTI NYMEX Futures Price at $38.40. This has helped the Aussie dollar to trade above 0.7500, and it seems like it can trade higher while the bounce in commodities continues.
Flows
In flows, non AUD trading was again a highlight. With the AUD up at around 75 US cents, clients who were looking to buy USD denominated bonds saw opportunity, with most buying focused on the Virgin 2019 fixed coupon bond. Fortescue Metals Group (FMG) also announced a potential JV with Vale which, combined with higher iron ore prices, caused their USD bonds to rally. We are generally seeing clients selling FMG into the rally and reinvesting in other USD names.
In FIIG originated bonds, we launched another bond for CML Group. The company sought to raise $25m at 8% with a first call date in five years. The issue is due to settle on the 23 March, when it should then commence trading in the secondary market.
Away from CML, we also had buying in Ansett Aviation Training, which has received consistent interest since renewing its contract with Jetstar and our company update last month, which can be viewed here.
In the AUD investment grade space we continued to have sellers in Qantas, given the higher prices post the Moody’s credit rating upgrade. Details on the upgrade can be found here. Glencore continued to see buyers come through, however, the pace of buying has moderated. In inflation linked trading, we had some buying in the Royal Women’s Hospital 2033 annuity, with some limited supply remaining.
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.