Tuesday 02 August 2016 by Week in review

Trading Desk

The RBA cut the official cash rate 25 basis points to 1.50% after last week’s inflation result showed the lowest annual reading since 1999

Economic Wrap

It was all about domestic CPI last week with another set of weak numbers leading to today’s rate cut at the RBA meeting in August. We published a noteExternal link - opens in a new window on the CPI figures last week, but in summary the annual CPI number came in at 1.0% for the year which was the lowest annual reading since 1999.

The RBA cut the cash rate 25 basis points this afternoon to a new low of 1.50% and the Central Bank will release its quarterly update of economic growth and inflation forecasts this Friday 5th August. The new RBA governor Philip Lowe will take over as Governor of the RBA on the 18th September.

The AUD is trading at 0.7524 post the RBA cut, compared with close to 0.7600 on Friday.      

US government bonds are a few basis points lower in yield at 1.525% for the 10 year. The other major economy government yields are also generally lower except for Japan’s JGB post the BOJ stimulus. Current 10 year Japanese government bonds are trading at a negative 0.06% yield, 10 year German bunds trading at negative 0.095% and 10 year UK government bonds (gilts) trading at 0.73%.

Other news:

  • Stocks closed slightly lower on Monday. In Europe the Eurostoxx was down 0.78% and the FTSE 100 down 0.45%. In the US the Dow Jones and S&P500 were down 0.15% and 0.13% respectively. US GDP came in weaker than expected on Friday at an annualised rate of 1.2%. This was much weaker than expected but was largely attributable to Inventories.
  • The world’s largest pension fund (Japan’s Government Pension Investment Fund) lost 3.8% in the FY ending March 31, according to Bloomberg, with losses on equity markets and unfavourable currency moves.
  • The BoJ increased the level of stimulus into the Japanese economy (QE) but the amount injected fell short of expectations.
  • Clinton and Trump accepted their respective nominations as Democrat and Republican presidential nominations with campaigning to intensify between now and November.
  • China Purchasing Manager’s Index (PMI) eased to 49.9 in July with some concern that the impact of stimulus measures is waning, leading to the sub 50 reading in the PMI which typically suggests economic contraction.

Credit indices spreads are higher over the last week with the US Investment Grade Index (IG) finishing Monday up 3bps at 75.2bps, whilst the US High Yield Index (HY) widened 15bps to finish Monday at 410bps.

Domestic interest rates are lower after the rate cut, with the AUD 3 and 10 year swap rates currently at 1.69% and 2.06% respectively. Ten year Australian government bonds last traded at 1.81%, which is 10bps lower on the week. The Australian iTraxx is at 110.25bps (or 1.1025% for this index of 25 Australian Investment Grade names), which is 2bps lower on the week.


Rabobank’s 5% fixed coupon Tier 2 held renewed interest last week. Having traded expensive compared to the equivalent floating rate line in the past, we hadn’t done much in the bond to date. Supply has now come at better levels relative to the floater, with bonds offered around 4% to the 2020 call date. With limited fixed rate Tier 2 issuance, this line was well received given the continuing outlook for lower rates.

In the other AUD trading, we have seen selling in Qantas lines continue following our article last month.External link - opens in a new window Many clients who bought these lines at issue, when they were non investment grade, chose to roll exposure back in to higher yielding options. Notably we had supply in the Sunland Capital 2020 fixed coupon bond at good levels and saw strong interest, with bonds available at a 7% yield handle.

FIIG also launched a new transaction for Eric Insurance, who sought to raise $22m through a 10 year Tier 2 note, with a first call date in 2021. Eric Insurance is a privately owned general insurer of motor related products, but importantly is APRA regulated. The deal will be FIIG’s first foray into new style Basel III Tier 2 bond issuance.

In the non AUD space, Newcrest published its quarterly report, noting a reduction of net debt by 27% over FY16 and increased production. The company’s USD bonds traded tighter on the back of this and we saw clients continuing to take profit after a sustained rally since the beginning of the year.