Monday 04 July 2016 by Week in review

Trading Desk

Poor news for Australian investors as election uncertainty continues. Demand grows for bonds which have rallied in the aftermath of Brexit

Economic Wrap

Election uncertainty with the potential for a weak government is poor news for investors. Additionally, it may be days for the lower house and weeks for the senate before an accurate picture of government is clear.

The AUD is trading lower at around 0.7450 and is likely to be under pressure, as offshore investors negatively view the election results.

US government bonds are lower in yield again at 1.445% for the 10 year.  10 year Japanese government bonds trade at a negative 0.25% yield and 10 year German Bunds trade at negative 0.125%.

Other news:

  • Stocks closed higher on Friday with European shares up 0.6% (Eurostoxx), up 1.1% for FTSE 100 and US shares up 0.19% for S&P 500
  • UK Conservative party leader major candidates are Theresa May and Michael Gove. Theresa May is ahead in a poll published over the weekend
  •  US data was mixed with manufacturing sentiment up (ISM index at 53.2), and construction spending down 0.8%
  • Eurozone business activity as measured by the Purchasing Manager’s Index (PMI) rose in June to 52.8, although the data was collected prior to Brexit

Credit indices spreads were lower over the last week with the US Investment Grade Index (IG) finishing yesterday 10bps tighter at 77.5bps. The US High Yield Index (HY) decreased 33bps to finish last week at 425.5bps.

Domestic interest rates are slightly lower over the last week, with the AUD 3 and 10 year swap rates currently at 1.77% and 2.18% respectively. 10 year Australian government bonds are below 2.00%, tightening 5bps last week to 1.98%. The Australian iTraxx is at 123.5bps (or 1.235% for this index of 25 Australian Investment Grade names), which is 12bps lower on the week.


In the wake of Brexit both bonds and credit have rallied. – we saw a lot of interest in FIIG originated deals, given the higher yields on offer in what seems to be an ‘even lower for even longer’ environment. The W. A. Stockwell 2021 fixed coupon bond became available to retail investors last week and had a good response. This followed on from both SCT Logistics’ fixed and floating lines becoming available the week prior. Retail investors benefitted from the additional supply and higher returns on offer.

We also saw a number of infrastructure names back in the spotlight with some investors looking to diversify into more defensive credits given the uncertain economic and political environment. This included bonds such as the Praeco 2020 and Royal Women’s Health 2017 fixed rate. We are now left better buyers of both lines. The MPC 2033 and JEM NSW Schools 2035 inflation linked annuities also attracted interest as conservative options.

The old style Genworth subordinated line matured last week. We saw clients who hadn’t yet reinvested looking at other Tier 2 options. As a result we saw buying in the new style longer dated Genworth Tier 2, with a first call in 2020, as well as the newer Westpac fixed coupon Tier 2 line with a first call date in 2023. Some clients also looked at USD names, with the recent QBE 5.875% coupon Tier 2, with a 2026 first call date, gathering consistent buying over the week.