Tuesday 03 May 2016 by Week in review

Trading Desk

Headline quarterly CPI posts a negative number, domestic rates fall and Adani sees good two way trading for its 2020 fixed rate bonds

Economic Wrap

Local inflation numbers surprised with the headline quarterly CPI number posting a negative number. This has greatly increased the chances of a rate cut either tomorrow or within the next two months with the RBA needing to address an inflation print below its 2-3% target. Economists are divided on the likelihood of a cut tomorrow versus the RBA waiting to see the impact of the Federal budget and further AUD data.

Most Australian banks report earnings this week with Westpac having reported today. Westpac increased loan impairments and marginally missed cash profit expectations ($3.9bn actual versus $4.0bn expectations). Payout ratios will be closely watched to understand potential for dividend cuts as will be any comments on capital structure with regard to regulation.

US government bonds are lower on the week with the 10 year yield at 1.83%. The trading range of US benchmark bonds has been 1.75% - 2.00% for the last two months.

Other news:

  • Forbes magazine cites that China’s economy will overtake the US circa 2018
  • US personal income rose 0.4% in March higher than an expected 0.3%.
  • Personal consumption as measured by the Personal Consumption Expenditure (PCE) index remains weak. The Fed’s typically uses core PCE as an inflation measure with the yearly number of 1.6% below the Fed’s 2% inflation target
  • The Japanese Finance Minister says ‘Yen appreciation is speculative and action will be taken when necessary’
  • Mixed news from Eurozone with flash GDP  up 0.6% for Q1 but consumer prices down 0.2% for April
  • Chinese PMI fell 0.1 to 50.1 versus expectations of an uptick to 50.4. Despite the reading being above 50, the fall will continue to fuel questions surrounding China’s economy

Credit indices spreads are a little higher over the last week with the US Investment Grade Index finishing at 77.5 basis points (bps), 4bps higher over the week. The US High Yield Index finished the week 13bps wider at 433bps.

Domestic interest rates moved lower over the last week, with the AUD 3 and 10 year swap rates currently at 2.07% and 2.65% respectively. The Australian iTraxx index is circa 132bps (or 1.32%, for this index of 25 Australian investment grade names), 6bps wider over the week.


Some major news last week came when Fortescue Metals Group (FMG) announced that they would be redeeming their 2019 senior unsecured USD bond. More details as well as a couple of reinvestment ideas which have gained strong traction since the news can be found here.External link - opens in a new window With the redemption not completing until 1 June 2016, clients have still been able to sell their FMG 2019 holdings close to the 104.125 redemption price and consider reinvestment options now. Unsurprisingly, both FMG’s 2022 senior secured and unsecured USD bonds have been a popular destination for reinvestment.

Back in the AUD space, resource related credits continued to attract interest. We began to see some good two way trading in the Adani 2020 fixed rate bonds. Benefitting from a senior secured position in the capital structure and a recent coupon step up, buying interest has picked up along with stronger commodity markets.

As a co-lead manager with NAB, FIIG successfully closed a $50m bond for Capitol Treasury Pty Ltd. This was a fixed rate bond paying an 8.25% semi-annual coupon, with a 2020 maturity. Capitol operates in the defensive healthcare sector, providing medical diagnostic imaging services. The primary book build is closed, but we expect the bond to start trading in the secondary market next week.

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.