Moody’s warned Australia on its AAA credit rating, domestic rates rose and Royal Bank of Canada 4.65% 2026 was added to the DirectBonds list. We also had strong interest in two new AUD Rabobank DirectBonds
Oil tumbled after output talks ended in Qatar without any agreement on limiting supply. Prices are seen to be 5-7% lower.
Economic Wrap
Last week Moody’s (Ratings Agency) warned that Australian government debt will likely climb without revenue-boosting measures. This is seen as implying Australia’s AAA credit rating is at risk unless action is taken to balance the Federal Budget within five years.
US government bonds are relatively unchanged over the week with the 10 year yield at 1.72%. The Beige Book release by the Fed suggested ‘national economic activity continued to expand in late February and March, though the pace of growth varied across the twelve Federal Reserve Districts’.
Other news:
- The IMF cut its global growth forecast figure from 3.4% to 3.2% on Tuesday, with growth expected to pick up to 3.5% in 2017
- US retail sales fell 0.3% in March, falling 0.4% below the +0.1% expectation
- Chinese consumer prices rose 2.3% in the year to March, missing the forecast of 2.5% but remaining the same as the previous month. China’s core inflation is more moderate at 1.5%, with food prices seen as the main drivers for the increased inflation figure
- UK CPI rose by 0.5% on the year while core CPI increased by 1.5%. This was the largest yearly CPI print since December 2014
Credit indices spreads were a little lower over the last week with the US Investment Grade index (IG) finishing Friday at 80.2 basis points (bps), down 2bps over the week. The US High Yield index (HY) was at 439.5bps, 14bps tighter over the week
Domestic market
Domestic interest rates are higher over the last week, with the AUD 3 and 10 year swap rates currently at 2.14% and 2.61% respectively. The Australian iTraxx is at 134.5bps (or 1.345%, for this index of 25 Australian Investment Grade names). Our iTraxx decreased 6bps over the week.
Locally, the unemployment rate fell from 5.8% to 5.7% in March, beating the 5.9% expectation. The participation rate stayed flat at 64.9%, whereas market expectations were for a 0.1% increase.
Flows
We added a new USD DirectBond last week: the Royal Bank of Canada 4.65% 2026 subordinated debt line. It is available in minimum parcels of USD10,000 and USD1,000 thereafter. The bond presents an opportunity to diversify away from USD resource exposures into a more stable, investment grade financial institution.
We also had interest in two new AUD Rabobank DirectBonds. The issues are also subordinated lines, however, they are callable in 2020, before their 2025 maturities. There is a floating rate line and a fixed coupon bond, with supply favouring the floater, given the much larger issues size of $475m compared to the $225m issued in the fixed.
In the context of higher iron ore prices and a positive Quarterly Production Report from Fortescue, the company came out and said that it was weighing up its options for reducing debt. With this and the resulting speculation around further bond buybacks, we saw its USD bonds rally around $4-$5 across the curve. This saw some profit taking by holders, but the opportunity also arose for clients to look at switching from the 2019 unsecured line to the 2022 senior secured. The trade gained a lot of traction, with clients able to increase income, sacrifice very little yield and pick up the three notches in credit rating that comes with the better position in the capital structure. We remain well placed to continue facilitating the trade.
As a reminder, 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.