Tuesday 14 January 2014 by FIIG Research Legacy

From the Trading Desk (14/01/14)

Yield direction and volatility

Yields were relatively flat over the week and closed slightly stronger, as the market speculated on US jobs data to be released late on Friday night Australian time. The 5 year benchmark swap rate decreased 5 basis points (bps) to close the week at 3.79%. Meanwhile the 5 year Commonwealth government bond dropped 4 bps to 3.52% by week’s end. Yields were also flat across the fixed rate lines throughout the week.

US Employment

The US Employment report was a mixed result, as the headline payrolls came out softer than expected (+74,000 vs +197,000 expected), but the unemployment rate was lower (6.7% vs 7.0% expected) due to a low participation rate. This was seen by the market as a poor result, with the low participation rate interpreted as to imply many Americans have “given up looking for work”. US 10-year treasury yields fell 10 bps on the news and Australian 10-year government yields extended their fall by 3 bps.

Back home in Australia, our employment report is due out on Thursday, with economists expecting 10,000 new jobs to be added and the unemployment rate to remain steady at 5.8%.


Following Standard & Poor's move last month, Moody’s Investor Services last week downgraded Qantas’ credit rating to non-investment grade and outlook negative. While the move was largely expected, margins in the fixed coupon bond and credit default swaps traded ~7bps wider following the announcement.

Other credit margins and trading activity

Trading margins on corporate issuance were mixed over the course of the week. Inflation linked securities saw a strong start to 2014 with both The Sydney Airport 2020 capital index bond (CIB) and the Envestra 2025 CIB lines turning over $2m for the week. Supply in these names tightened up later in the week, however FIIG currently has excellent access to the Sydney Airport 2030 CIB at an indicative offer yield of 7.20%.

Supply is more prevalent in the index annuity bond (IAB) space with some of our favourite issues in ample supply. Current indicative offer yields are below:

  • MPC Funding 2025: 5.80%
  • MPC Funding 2033: 6.40%
  • Plenary Justice 2030: 6.35%

FIIG originated issues had an active week with the Payce December 2018 and Silver Chef (SIV) September 2018 fixed rate lines both making the most traded list. Payce remains accessible; however demand of the SIV has started to outstrip supply. Other FIIG issues experiencing high demand are the PMP October 2017 and the G8 Education August 2019 fixed rate bonds.

Elsewhere in the fixed rate corporate sector, supply of the Stockland November 2020 fixed rate note became available. Demand has been slow on the uptake but given that the Stocklands have become increasing difficult to source in recent times, supply should not be expected to last long.


Offer levels are indicative as at 14 January 2014 and subject to change based on demand and market movements

Yields for floating rate notes are estimated as the sum of the swap rate to maturity / call and the trading margin

Yields for capital indexed bonds and index annuity bonds are estimated as the real yield plus a 2.50% inflation assumption