Tuesday 03 December 2013 by FIIG Research Legacy

From the Trading Desk (03/12/13)

This week: the RBA chose to leave the cash rate on hold at 2.5%, there could be substantial upside for Qantas fixed rate bonds, and trading activity was still elevated as investors switched into the new Payce Consolidated issue

Yield direction and volatility

Yields were relatively flat last week with the US markets closed for the Thanksgiving holiday and the jobless data figures coming through in line with market expectations. The 5 and 10 year benchmark swap rates fell only 3bps across the week, with the yields closing at 3.77% and 4.58% respectively. Likewise there was a movement of 5-6bps across the 5 and 10 year Commonwealth government bonds as they decreased to end the week at 3.50% and 4.22% respectively.

As widely expected, the Reserve Bank of Australia (RBA) left interest rates on hold at 2.50% yesterday, stating that the full effects of the recent easing cycle were still coming through. There is currently an uncomfortable dichotomy between unemployment, which is edging higher, and the housing market, which is expanding rapidly, and the RBA appear unwilling to combat either at the risk of exacerbating the other. Comments were also included regarding the “uncomfortably high” level of the Australian dollar, which would have added further resistance to any move higher in rates.

Credit margins and trading activity

Trading margins were mixed over the week on corporate issuance. Both lines of the Swiss Re contracted last week after a dip in their price the prior week. The Swiss Re 2017 floating rate note (FRN) contracted around 6bps, while the Swiss Re 2017 fixed rate bond traded circa 5bps tighter.

With the government canvassing options as to how it could support Qantas, all of which appear to be positive outcomes for the credit, spreads on credit default swaps (CDS) narrowed 14bps last week, from 209bps to 195bps. We have good access to the April 2020 fixed rate bond at an indicative yield of 6.08%*.

Last week saw some hard to source bonds become available including a supply of the Genworth June 2016 floating rate note, Praeco July 2020 fixed rate bond and JEM (Southbank) June 2018 fixed rate bond in small volumes. Most of this supply was taken up immediately by a backlog in demand, however there is still a small supply of Genworth available at BBSW plus 223bps (5.32% yield*).

Other FIIG originated bonds were well traded.There was $9m traded across PMP Oct 2017, Cash Converters Sept 2018 and G8 Education Aug 2019, with FIIG well situated to facilitate good two-way flow. Current indicative offer yields on these three are as follows:

  • PMP Finance: 8.32%
  • Cash Converters: 7.64%
  • G8 Education: 7.06%

The week also saw a small supply of Envestra ILB 2025 become available as clients moved out of their positions to purchase the new issue.

The DBNGP 2019 fixed rate line traded for its second week in the retail space and proved to be just as popular with $1.5m traded in volume. There is good supply of this bond and it is available at an indicative yield of 5.50%*.

The Sydney Airport ILB lines continued to dominate the inflation space for the week with both the 2020 and 2030 lines well traded.  There was $9m traded between the two maturities with good supply still available in both.

The Novacare index annuity bond (IAB) 2033 line became available last week in decent size, although all was traded away due to unfilled demand.  This is a tightly held bond and at present supply remains scarce. Again over the week, the JEM NSW Schools 2035 IAB line was traded and still remains in good supply.

The National Wealth Management floating rate note, a popular option for retail investors, became available last week in decent supply. There remains stock behind this and FIIG is well placed to fill bids at an indicative level of 4.83%*.

*Offer levels are indicative and subject to change based on demand and market movements; yields for floating rate notes are estimated as the swap rate to maturity / call plus the trading margin; yields for inflation linked bonds and index annuity bonds are estimated as the real yield plus a 2.50% inflation assumption.