Monday 26 September 2016 by Week in review

From the trading Desk

Clinton and Trump face off on TV Tuesday at 9.30 am Sydney time. More than 100 million people are due to watch. US Fed left rates on hold, BoJ confirmed it will keep buying equities and bonds and Philip Lowe spoke for the first time as RBA governor

Economic Wrap

Philip Lowe spoke for the first time as RBA governor at the Parliamentary Standing Committee for Economics and criticised behaviour, culture and incentivisation structures at the nation’s big banks. A parliamentary hearing in October will question Australia’s big four banks.

In the US, the Federal Reserve left the federal funds rate on hold last week, but noted that “the case for an increase in the federal funds rate has strengthened”. Fed Chair Janet Yellen indicated that the November and December meetings are “live” meetings, and expects to hike rates before year end. There are some concerns that US economic sentiment is deteriorating as the US election nears.

The Bank of Japan (BoJ) met Wednesday and ratified its commitment to keep injecting money into the Japanese economy by purchasing equities. Regarding interest rates, it kept the short term policy rate (overnight lending rate) at negative 0.1%, confirmed its inflation target at or above 2.00%, and withdrew from buying 10 year Japanese government bonds at yield below 0%. This has the effect of causing the yield curve to steepen, with short term rates continuing to stay very low, but excluding BoJ support in the longer maturity area.

The AUD is trading at 0.7610 today, which is a continuation of the higher price action following US CPI data of a week ago. The high price over the last 12 months was 0.7813 according to Bloomberg.     

US government bonds are lower in yield over the week, with the 10 year bond currently at 1.6175%. Other major economy government yields are also lower, with the exception of Japan. Current 10 year Japanese government bonds are trading at a negative 0.045% yield, 10 year German bunds are back in negative territory trading at negative 0.08% and 10 year UK government bonds (gilts) are trading at 0.73%.

Other news:

  • Stocks closed lower on Friday. In Europe, the Eurostoxx was down 0.64% and the FTSE 100 down 0.03%. In the US, the Dow Jones and S&P500 were down 0.71% and 0.57% respectively
  • US economic data was weaker, with purchasing manager’s index (PMI) at 51.4% versus expectations of 51.8%
  • The UK’s decision to leave the EU will not dent growth in 2016, according to economic forecasts compiled by the UK Treasury and in a Daily Telegraph article
  • Deutsche Bank has communicated that it has no intention of paying anywhere near the $14bn fine imposed by the US department of justice for its role in securitised products
  • Algeria is hosting OPEC members this week, with Saudi Arabia suggesting it is willing to cut output. Saudi Arabia is the world’s largest oil exporter and are keen to see prices stabilise, having fallen close to 50% in two years

Credit indices spreads are unchanged to lower over the last week, with the US Investment Grade Index (IG) finishing Friday unchanged at 76.5bps, whilst the US High Yield Index (HY) narrowed 20bps on the week to finish Friday at 387bps.

Domestically, 10 year Australian government bonds last traded at 1.9775%, which is 13bps lower on the week. The Australian iTraxx is at 103bps (or 1.03% for this index of 25 Australian Investment Grade names) – 5bps higher on the week.


Last week we launched a transaction to tap the existing issue for commercial equipment financier Axsesstoday. The company sought to raise a further $15m to $20m under the same terms of the $20m note it issued in October last year. The increase was priced at par, with the notes paying a coupon of 6.50% over 3 month BBSW. There are early call provisions, with the issuer first being able to call in October 2017 at a $103 price, with final maturity at par in 2021.

In other AUD trading, we saw an increased number of clients considering inflation, namely in the Sydney Airport 2020 and 2030 capital indexed bonds. While we have generally seen sellers in both lines – unsurprisingly given depressed CPI figures – buyers have recently emerged in the longer 2030 option, for those prepared to take a long term view that we’ll see an uptick in inflation.

In the USD space, the more recent DirectBond options took charge with continued buying in Dell Technologies Group, across both the senior secured and unsecured lines. Supply remains good in the name, with most investors looking at the 2036 secured and 2028 unsecured lines, indicatively offered at yields to worst in the mid 6% and low 6% range respectively.

Similarly, buying continued in the 2022 and 2040 TransAlta fixed coupon USD bonds, with high investment grade yields to maturity of 4.31%* and 6.89%* respectively. A good portion of buying was funded by switches out of Newcrest, with investors able to pick up yield for the same rating and similar tenor.