Trump plans to roll back Dodd-Frank bank legislation and the Bank of Japan intervenes in the Yen bond market
Economic Wrap
Trump’s unpopular draft legislation to restrict entrants into America from several Middle Eastern countries is likely to become a test of his ability to push through his policies, versus Congress’s ability to halt some of his disliked reforms. Although stocks and credit continue to benefit from his pro business measures, this will likely change if he is unable to pass his policies.
Banks and financial institutions benefitted last week from Trump’s plans to roll back Dodd-Frank legislation. This regulation was enacted by Obama’s administration following the GFC and any weakening of the legislation will be seen as a positive for Wall Street and bank profits.
The Bank of Japan intervened in their government bond (JGB) market to cap rising yields, after a sell off which saw the 10 year JGB rise in yield above 0.10%. The move was a clear signal by the central bank that it intends to strongly suppress any upwards movement in yields.
Elsewhere, Asia was quiet with Chinese New Year celebrations still in effect, although China’s central bank raised short term rates slightly in its repurchase activities.
We continue to recommend portfolios of equally weighted proportions of fixed, floating and inflation linked bonds, noting that this is easier for wholesale investors to achieve.
US government 10 year bonds are currently yielding 2.465%, which is 2 bps lower than a week ago. Although the headline US jobs numbers were positive, average earnings numbers were weak – with bond yields easing as investors pushed out their timing on the next US rate rise.
Current 10 year Japanese government bonds are trading at a 0.1075% yield, 10 year German bunds are trading at 0.412% and 10 year UK government bonds (gilts) are trading at 1.352%.
Other news:
- Stocks were all higher on Friday. In Europe, the Eurostoxx was up 0.60% and the FTSE 100 was up 0.67%. In the US, the Dow Jones was up 0.94% and the S&P500 was up 0.73%
- The Reserve Bank of Australia meets tomorrow with no change in rates expected. Australia reported a record trade balance surplus last week of $3.51bn in December. This surplus was a surprise and beat forecasts by approximately 50%. The move is seen as being positive for our dollar
- Oil prices continue to push higher, with the West Texas Intermediate benchmark futures contract at almost US$54. Crude oil has risen close to 20% in three months since OPEC agreed on production cuts, according to Bloomberg
- Credit indices spreads are largely unchanged over the last week with the US Investment Grade Index (IG) finishing Friday at 63.50 bps. In high yield, the Bloomberg Barclays US Corporate High Yield Index closed Friday at 1847.56, up 6 points
Domestically, the 10 year Australian government bonds last traded at 2.79%, 6.5 bps higher on the week. The Australian iTraxx is at 92.2 bps (or 0.922% for this index of 25 Australian Investment Grade names), unchanged over the week.
The Aussie dollar is trading at 0.7675 today, up 1.5% from last week. The Aussie currency versus the Pound has increased again to 0.6147, up 1% on the week.
Flows
We added two new USD DirectBonds to the menu last week from Talen Energy and Enviva Partners. The majority of our non AUD trading focused on the US electricity producer, Talen Energy. The senior unsecured June 2025 bond pays a 6.5% fixed coupon and trades at a discount, yielding close to 9% to maturity. The bond is in good supply and more information is available here.
The other USD addition was from Enviva Partners, the world’s largest producer of wood pellets used for power generation. This line is also a senior unsecured bond, maturing in 2021 and paying a fixed 8.5% coupon. The relatively short dated line is indicatively offered in the low 6% area as a yield to maturity, or in the mid 5% area as a yield to the optional par call in November 2020. More detail, including the early call provisions, is available here.
In AUD, inflation linked trading picked up following weaker CPI data from the week prior. We had better selling in the Sydney Airport 2030 inflation linked bond and institutional buying in the MPC 2025 inflation linked annuity, which saw clients selling to take advantage of improved liquidity in the line. However, clients comfortable with longer term inflation were buyers on the dip and we saw that emerge on the Royal Women’s Hospital 2033 inflation linked annuity and the Australian Gas Networks 2025 inflation linked bond.