Tuesday 17 December 2013 by FIIG Research Legacy

From the Trading Desk (17/12/13)

This week: FOMC meeting; RBA minutes; Qantas update; Silver Chef stumbles on profit guidance

Yield direction and volatility

Yields drifted marginally lower over the week on little data, only to reverse by a few basis points by week’s end.  US retail sales data came in stronger than estimated, adding to speculation the Federal Reserve will taper its stimulus program. Australian employment, released on Thursday, was also stronger than expected. In reaction to the data the 5 and 10 year benchmark swap rates gained between 1 to 2 basis points (bps) to close the week at 3.77% and 4.63% respectively. Similarly there was a slight increase in yields on the 5 and 10 year Commonwealth government bonds, which closed at 3.50% and 4.32% respectively.

FOMC meeting

The US Federal Open Market Committee (FOMC) is currently conducting its final meeting for 2013 and will announce the outcome for policy at 6:00am Thursday AEST. The committee will have the latest inflation figures in the form of the Consumer Price Index (CPI) at its disposal, which will have been released by the time this publication is released. The vast majority of economists are expecting that any tapering of the Quantitative Easing (QE) program will not begin until next year, with only a handful calling for a slight reduction ($10 billion) to be announced at this meeting.

In fact, the majority of current research seems to imply an expectation that tapering will not begin until the second half of next year. Quick analysis of major economic data indicates a meaningful recovery may be underway though. As evidenced by the charts below, employment and housing are experiencing a significant recovery, while inflation and growth are not yet following through. It could be argued that the first two are leading indicators, while the latter two are lagging, so it should be only a matter of time before all the pieces are in place for monetary policy to be tightened and the first step is the gradual unwinding of QE.

Source: FIIG Securities, Bloomberg; NAHB: National Association of Home Builders

The Fed has been hinting for a few months now that the case for tapering is getting stronger and with every mention, markets (both equity and credit) take a dip. Ironically, recent economic data releases have had an opposite effect on markets than one would expect: every strong number is met with weakness and every weak number is followed by market strength. It would seem that the markets are not going to be happy with the punch bowl being removed.

The next FOMC meeting is in late January, and then there is a break until late March. I would expect the announcement to come in January, but whether it comes tonight, in January, or later, one thing is clear: there will be a knee-jerk negative reaction in equity and credit markets, and this should be a great buying opportunity. Markets must eventually stop viewing good news as bad.

RBA minutes

The Reserve Bank of Australia released the minutes from its 3 December meeting yesterday, and highlighted what it considers an “uncomfortably high” Australian Dollar to maintain an easing bias. The currency notwithstanding, the divergent signals of employment and housing are currently restraining a move in either direction by the RBA.

Reserve Bank Governor Glenn Stevens will speak today before the House Economics Committee ahead of the US Federal Reserve policy decision.

Qantas update

After trading to a high of 7.55% last week following the S&P rating downgrade, the yield on the Qantas April 2020 fixed rate bond rebounded strongly to its current level of around 7.00%.

The bond continued to be traded heavily over the week as clients took advantage of opportunistic buying. It traded $22.5m in volume over the week, with over 100 trades executed. It still remains traded with good two-way flow.

The credit was further supported by Tony Abbott indicating over the weekend that the government would welcome and respond to any Qantas proposal, including lifting of foreign ownership restrictions. At a margin of around 290 basis points (bps) over swap, this remains an attractive opportunity, even without any government supportive measures.

Silver Chef

The trading margin on the FIIG originated Silver Chef September 2018 fixed coupon bond widened around 15bps after the company announced profit guidance 10%-15% below its previous estimates. This appears overdone considering the small downgrade, but the move in fixed income was dwarfed by a 38% drop in Silver Chef shares.

Recently made available to retail clients, the bond is currently offered at around 6.84%, which equates to a margin of 316bps over swap.

Other credit margins and trading activity

The Australian National University (ANU) October 2029 index annuity bond (IAB) was the most heavily traded inflation linked asset last week as volume supply came out of the institutional sector. $4m in turnover was recorded across ANU taking FIIG out of available stock. ANU remains in high demand.

Sydney Airport 2020 and 2030 capital index bonds (CIBs) continued to trade well with $9m transacted over the week between the two lines. There remains good supply in the Sydney Airport 2030 bond; however, it is becoming harder to access the shorter dated line. The 2030 maturity is available with an indicative offer yield of 7.25%.

Another IAB which proved to be popular last week, the MPC Funding Ltd 2033 line was well traded and remains in good supply. Likewise the shorter dated line, MPC Funding Ltd 2025 IAB also has good availability and both lines are available at indicative offer yields of 6.00% for the 2025 and 6.50% for the 2033.

As clients switched to Qantas, there were a suite of bonds that became available which are often harder to source. Tightly held FIIG originated bonds, Silver Chef September 2018, G8 Education Ltd August 2019 and Mackay Sugar Ltd April 2018 all became available and were snapped up by investors. There remains a limited supply at the following indicative offer yields:

  • SIV September 2018:   6.88%
  • G8 August 2019:  7.02%
  • MSL April 2018:   6.73%

Another bond that became available off the back of Qantas was the Jem Southbank June 2018 fixed rate line. With $2.5m traded it proved to be popular with good two-way flow and supply has now been exhausted.  


Offer levels are indicative as at 17 December 2013 but 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 capital indexed bonds and index annuity bonds are estimated as the real yield plus a 2.50% inflation assumption