Please note that the figures mentioned in this article are no longer available.
Australian iTraxx
The Australian iTraxx Credit Default Swap (CDS) index tracks the performance of Australian corporates and is an indicator of credit risk for investment grade entities. The lower the spread, the lower the perception of credit risk. The charts below show performance over one month and one year.
CDS markets moved out over the month as QE jitters grew and global credit curves steepened. The Australian iTraxx is now almost 30bp wider than early May and back where it started the year.
Bond market in review
Bond volatility has picked up as the market contemplates a tapering of the Fed’s asset purchase program. There’s still uncertainty as to what a reduction in liquidity means for riskier assets.
Domestically the RBA left the cash rate unchanged at 2.75% at the June Board meeting, in line with market expectations. Economic data was generally soft this month. Q1 GDP rose by a modest 0.6%, with yearly growth at a below-trend 2.5%. The April figures for both the trade balance and retail trade also fell short of market expectations.
Offshore, both the ECB and BoE left monetary policy unchanged however ECB Chairman Draghi noted the recent improvement in economic sentiment indicators. In the US, further uncertainty over the Fed’s monetary policy settings and softer than expected employment growth saw Treasury yields fall.
S&P/ASX 200 Accumulation Index v UBS Composite Bond Index
The UBS Composite Bond Index is designed to measure the performance of the Australian bond market. The Bond Index consists of approximately 300 fixed interest securities issued by the Commonwealth Government, the State Government and semi government authorities as well as investment grade corporate issuers. This index provides a good representation of the movements in value and interest rates of this asset class.
The poor returns experienced in the equities market during May has seen fixed income pull ahead on a long-term annualised basis. From 30-Sep-89 to 31-May-13, the UBS Composite Bond Index has returned +8.93% compared to the S&P/ASX200 Accumulation Index with a return of +8.88%.
Credit spreads
The data in the chart below is taken from Bloomberg Fair Market Curves. The credit spreads (over the applicable swap curve) are based on a five year maturity representing the composite credit spread of securities around that maturity for each ratings band.
Significant ratings changes over the month
- S&P has revised the insurance rating criteria for 23 large insurance groups including QBE. QBE Insurance Group was downgraded and operating subsidiaries were affirmed
- Moody's announced that it put on review for downgrade eight Australian banks whose subordinated debt ratings have benefited from an uplift linked to Moody's prior assessment of systemic support. The affected banks are: ANZ, CBA, NAB, Westpac, Macquarie, Bank of Queensland, Bendigo and Adelaide, and Suncorp. Moody's highlights that the reviews of the banks' subdebt ratings are not in any way related to any deterioration in the affected banks' fundamental credit quality
- S&P took a number of negative rating actions on UK banks, reflecting their view that industry risks for UK banks have grown from regulatory change and the aggressive risk appetite of some banks. As a result, S&P changed the outlook on RBS to negative from stable, and placed the outlook on Nab's Clydesdale Bank on CreditWatch developing.
- AMP Life's rating was affirmed, following the introduction of S&P's new methodology. At the same time S&P affirmed AMP Ltd and AMP Group Holdings rating, two notches lower than the life operating company
- S&P upgraded AMP Bank reflecting the improved assessment of the bank's standalone credit profile. The improved assessment reflects the bank's revised capital and earnings assessment to "very strong" from "strong"
- S&P lifted its outlook on the US sovereign rating from negative to stable. The rating action reflects S&P's view that some of the downside risks on the U.S. have receded to the point that the likelihood of a rating downgrade in the near term is less than one in three. Aside from tax hikes and expenditure cuts, stronger-than-expected private-sector contributions to economic growth, combined with increased remittances to the government by the government-sponsored enterprises Fannie Mae and Freddie Mac (reflecting some recovery in the housing market), have led the Congressional Budget Office to revise down estimates for future government deficits
- S&P affirmed Suncorp-Metway's rating after the announcement that it had sold $1.6bn of its non-core loan portfolio to Goldman Sachs. S&P said that a further reduction of non-core lending assets is within their expectations at the current rating level, and they believe that earnings streams will improve and at the same time become more stable and repeatable, underpinned mainly by lower-risk residential mortgage assets
Comments from the facilitation desk
(Please note the following is sales commentary and is not to be considered research)
Inflation protection – still the best value
Credit-linked inflation protection remains the standout sector in terms of relative value. Some of our favourite names are still yielding close to inflation +4% or higher. While recent market volatility has freed up offers, availability of some names is sparse – interested investors should act quickly. In regards capital indexed bonds (CIBs), Sydney Airports remain in good supply and we have seen some intermittent offers in our other favourites; Electranet and Envestra. Inflation indexed annuities also offer good value.
Short dated bonds delivering strong boost to yields
While fixed income securities such as corporate bonds offer an excellent way to lock in returns over a longer time period, many investors are new to the asset class. Hence, they are not comfortable taking the market risk of a longer dated security.
There are however, short dated corporate bonds, as well as a number of subordinated debt and Tier 1 securities due to be called over the next 12 months, which offer a pick-up in return without taking on significant duration risk.