Monday 16 May 2016 by Week in review

Trading Desk

The RBA will remain in focus with tomorrow’s release of the May minutes, global growth concerns lingered as government bond yields fell, and investors find value in Impact Homes bonds

Economic Wrap

The RBA’s May minutes are released tomorrow, with economists looking for clues about if and when further rate cuts may occur.  The outlook is slightly complicated by the replacement of Governor Glenn Stevens with Deputy Governor Philip Lowe in September.  Nevertheless the RBA expects inflation to be below its 2% lower band throughout 2016 and beyond.

The Australian monthly jobs data are due to be released on Thursday with the Bloomberg consensus for employment gains of 12k, and the unemployment rate to be slightly higher at 5.8%. More weak data will increase the pressure for further RBA rate cuts in the short term.

The AUD fell throughout last week to its current level of 0.7287 versus the USD. This is the Australian dollar’s lowest level since March and it would likely stay under pressure until further clarity is received from US Federal Reserve about the future path of US interest rates.   

This week US government bond yields fell, with the 10 year at 1.70%. Over the last few months, the yield on 10 year US benchmark bonds has fluctuated between 1.70% and 2.00%. A break below 1.70% would indicate further concerns about the health of the US economy. 

Overseas news:

  • US retail sales were stronger than expected, rising by 1.3% in April (consensus 0.8%).  Stocks closed lower with the Dow Jones down 1% and the broader S&P down 0.85%
  • In China, retail sales were upwards of 10.1% for the year, but slightly below expectations of 10.5% 
  • BOE governor Mark Carney warned a UK vote to leave the EU could cause a ‘technical recession’
  • Japan’s PM has reportedly postponed an increase in consumption tax, believing any increase would hit the world’s third largest economy

Credit indices spreads were slightly lower over the last week with the US Investment Grade Index (IG) finishing Friday at 83.5 (-2bps on the week) and the US High Yield Index (HY) at 454.0 (-9bps on the week). 

Domestic market

Domestic interest rates were lower over the last week, with the AUD 3 year and 10 year swap rates currently at 1.78% and 2.34%, respectively. Note that the 10 year Australian government bond is yielding 2.23%, which is close to a record low.  The Australian iTraxx is circa 135.0 basis points (or 1.35%, for this index of 25 Australian Investment Grade names). This is unchanged on the week.


With the recent rally that we’ve seen in both bonds and the USD, we saw a number of clients with long duration USD exposures taking advantage of the rally and selling to reinvest in shorter dated AUD lines. The main trade of this type was clients selling the Newcrest 2041 USD line to buy the Adani 2020 AUD bond.

For other investors wanting to add or maintain USD exposure, NCIG attracted some buying. With the potential for credit enhancement through a planned implementation of a capital restructure in June, we saw the bonds slightly higher in price, however we continue to have access to supply.

Staying in the USD space, we added two new DirectBonds to our non AUD suite. These are the BlueScope Steel 2021 6.50% fixed coupon USD bondExternal link - opens in a new window and the Sydney Airport 2026 3.625% fixed coupon USD bondExternal link - opens in a new window. Both are available in minimum parcels of USD10,000.

In AUD trading, Impact Homes is receiving a lot of interest after the company released results for the 9 months to 31st March. Results exceeded expectations with NPAT and sales ahead of budget and forward contracted revenues increasing 29%. Given the 2021 fixed coupon bond amortises overtime, the first principal and interest payment was made last week, which de risks the bond. Market yields have tightened over 40bps in the last few weeks, while Impact has held relatively steady, so the over 8% yield offered on the bonds look especially attractive in light of the positive results and first principal pay down.