Monday 08 August 2016 by Week in review

Trading Desk

Bank of England cuts interest rates and strong US payroll numbers increase the chance of a US rate hike before year end

Economic Wrap

US jobs data on Friday was strong and this has increased the probability of a 25 basis points rise in the US Fed Funds rate to circa 50% by year end.

US unemployment was unchanged at 4.9%, the non farm payrolls data was +255k jobs for July compared to estimates of 180 to 190k. Additionally, US average earnings increased 0.3%.

The AUD is trading above 0.7600 today, which is unchanged from Friday, helped by rising commodity prices.

US government bonds are higher in yield at 1.585% for the 10 year. The other major economy government yields are broadly unchanged except for the UK post the BOE easing. Current 10 year Japanese government bonds are trading at a negative 0.06% yield, 10 year German bunds are trading at negative 0.07% and 10 year UK government bonds (gilts) are at 0.67%.

Other news:

  • Stocks closed higher on Friday. In Europe the Eurostoxx was up 1.41% and the FTSE 100 up 0.79%. In the US the Dow Jones and S&P500 were up 1.04% and 0.86% respectively.
  • The Bank of England cut rates 25 basis points to 0.25% and increased the amount of QE injecting billions into the UK money markets and assisting banks by enabling special facilities open to them. The pound fell but has stabilised above 1.3000 (against the USD) with vast short positions according to CFTC data limiting the Pound’s fall.
  • The US released trade deficit data showing an increase in imports to USD44.5bn versus USD41bn previously.
  • The BOJ is undertaking a survey and review of monetary policy and its effectiveness. Results are due on September 20th whereupon increased stimulus is likely.
  • China data continued weak with imports down 5.7% and exports +2.9%.

Credit indices spreads are lower over the last week with the US Investment Grade Index (IG) finishing Friday down 2.5bps at 70.725 bps, whilst the US High Yield Index (HY) narrowed 9bps to finish Friday at 392.5bps.

Domestic interest rates are higher in the 10 year, with the AUD 3 and 10 year swap rates currently at 1.69% and 2.17% respectively. Ten year Australian government bonds last traded at 1.946%, which is 10bps higher on the week. The Australian iTraxx is at 104.25bps (or 1.0425% for this index of 25 Australian Investment Grade names), which is 6bps lower on the week.


In FIIG originated deals, McPherson’s announced preliminary FY16 results which validated the company’s new focus on higher margin business. Despite 10.5% lower revenues, earnings before interest and tax were up 14.4% and net debt was reduced by 35.3%. With both of the company’s fixed and floating bonds offered at a yields to maturity north of 6%, the positive results prompted some buying. We remain well placed to offer stock in the shorter 2019 floater, while the 2021 fixed coupon line is become slightly harder to secure.

Our recent Eric Insurance Tier 2 deal also settled last week and started trading in the secondary market. Given the small issue size and oversubscribed book, a small amount traded over par, but we remain buyers, with little stock being offered at the moment.

In non AUD trading, there was continued interest in Newcastle Coal’s 2027 first call fixed coupon bond after we saw thermal coal prices at 10% at one point. We have had good supply in the name over the past 6 weeks, however this is seemingly coming to an end with very small volume still available.

Fortescue Metals Group (FMG) also received renewed interest following their recent Quarterly Production Report, where they outline their expectation of production costs of USD12 – USD13 per tonne over the next year. With costs reducing and USD1.6 billion of cash on balance sheet, we saw buying which favoured the 2022 fixed coupon unsecured bond. While we have had access to bonds, supply has been more difficult compared to the senior secured line, given the smaller outstanding issue size of about USD478m vs USD2.16bn in the secured.