Monday 29 January 2018 by Week in review

From the trading desk

Domestic CPI due Wednesday, active USD trades following new USD DirectBond, Noble 2024 tendered for up to USD250m with new 2026 bond expected, Sydney Airport 2030 ILB a popular switch from USD bonds. Liberty 2020 and Challenger 2022 bonds in high demand

What’s trading


  • Two schools of thought saw Sydney Airport 2030 trade heavily in the new year:

    1. Investors wanted to shorten the tenor and move out of AUD as it hits highs against the USD. They moved into names such as the Barminco 6.625% 2022 bond, currently trading at a yield to worst of 6.365% per annum

    2.  Investors wanting to add inflation protection bought the bonds at an indicative range of CPI+2.80%p.a

  • The Liberty 5.10% 2020 bond  continues to be a popular choice after we secured a parcel at the price of 102.35, giving investors just over 4.0%p.a yield. A popular switch into the Liberty 2020’s was out of the Downer 5.75% 2018 bond, with investors picking up 55bps. A small parcel of the Liberty bond  is available at the indicative price of 102.35.
  • The Challenger BBSW+2.10% callable 2022 bond has been well sought after, having tightened 9bps this year. The bond is still trading roughly 10bps wider than its comparable, the AAI BBSW+3.20% callable 2022 bond. Supply continues in Challenger bonds, however we believe it will dry up as the bond will eventually trade in line with the AAI bond. Investors can purchase Challenger at an indicative yield to worst of 4.00%p.a


  • Trading in the USD space was active last week following the addition of a new security to the DirectBond list, Mallinckrodt International Finance (MNK). MNK is a global business that develops, manufactures, markets and distributes branded and generic speciality pharmaceutical products and therapies. The MNK 2022 senior unsecured bond, which pays a fixed rate, semi annual coupon of 5.75%, was added to the list early last week, making it available for purchase by wholesale clients only. The bond mainly resonated with clients looking to diversify away from overexposure to oil and gas producers, and also with outright investors taking advantage of the strong AUD. Clients looking to enter a position in MNK can expect to do so at an indicative yield to worst of 6.96%
  • As mentioned, oil and gas producers saw heavy flow last week as many clients chose to sell in favour of the new MNK offering. Chief among these were Ensco PLC’s March 2025 fixed rate note and the Noble January 2024 fixed rate bond Both bonds experienced significant price increases in January partly in favour to the strengthening oil price. Noble’s 2024 bond also popped in price following the announcement of a new USD750m 2026 issue for the purpose of tendering their shorter dated securities. Clients can expect to exit their Ensco positions at an indicative yield of 7.39%. However, clients wishing to sell their Noble holdings will have to wait for the tender period to be finalised.

Economic wrap

Robust US data continues with the Leading Index, Durable Goods, Capital Goods and Personal Consumption all printing better than expected numbers. The only miss was 4Q17 GDP at 2.6% (consensus was 3.0%), but this was largely due to the volatile trade and inventory components, which are likely to be temporary and could reverse out in future quarters.

Domestic CPI will be released on Wednesday, with the year on year figure expected to increase to 2.0% from the prior 1.8% print.

Other news

Last week, Noble Holding International tendered for up to USD250m of the 2024 issue at an all in price of USD96 – well above the prior trading level in the mid USD80s. A number of holders chose to tender, but we believe a better path is to sell outright given that the tender is for only a quarter of the bonds outstanding and reasonable fills are unlikely. Please note, any holder who chose to tender is locked out of trading until 14 February 2018. A new, higher rated bond from Noble maturing in 2026 is coming.

There are a variety of ways to compare risk and return, but one of the simplest is the difference between the yield of a corporate bond and that of a government bond. When we compare corporate inflation linked bonds (ILB) to Commonwealth ILBs, we remove inflation expectations and maturity premium, and factor in the risk free rate. This allows the spread to simply reflect the default risk and liquidity premium.

Sydney Airport ILBs are between 175-200bps wide of their benchmarks, which is a much greater yield premium than for equivalently rated fixed rate bonds against Commonwealth fixed rate bonds.