Tuesday 04 February 2014 by FIIG Research Legacy

From the Trading Desk (04/02/14)

This week: Federal Open Markets Committee tapers QE; yields fall as equity volatility rises, then rebound following RBA meeting; US employment due Friday; Global Switch added to FIIG DirectBonds list

Yield direction and volatility

Yields rose marginally leading up to the US FOMC meeting, where its monthly bond purchase program was trimmed by another $10 billion to $65 billion, and subsequently dropped back below previous levels. The 5 year and 10 year benchmark swap rate decreased 5-6 basis points (bps) to close the week at yields of 3.59% and 4.36% respectively. There was less movement across Commonwealth government bond yields, with the 10 year rate dropping only 2bps to end the week at 3.99%. Fixed rate bond yields followed suit and were lower across the board also following US tapering.

Swaps and bond yields continued to decline this week prior to the RBA meeting, as a rout in the equity markets took hold. This is being driven by a major correction in emerging markets that is threatening to spill over into the higher-risk asset classes (such as equities), and by renewed concern over the US debt ceiling and potential government default. A temporary postponement of the debt ceiling, placed last October to avoid a government shutdown, expires this Friday.

The RBA left monetary policy unchanged at 2.50% yesterday, which was universally expected by economists, but the language was less dovish than prior statements. In particular, comments regarding an uncomfortably high Australian dollar were removed, the unexpectedly high inflation reading from the December was referenced, and further improvements in consumer demand and housing construction were foreshadowed. In response, swap and bond rates rose between five and ten basis points, and the Australian dollar strengthened, breaking back above 88.5 cents against the US dollar.

Friday will see the release of employment figures in the US, which is expected at +180,000, a rebound from the surprisingly weak figures last month (+74,000). The Australian employment report is due next Thursday.

New DirectBond - Global Switch

FIIG last week added the Senior Unsecured Fixed Rate Notes issued by Global Switch Property (Australia) Pty Limited to the DirectBonds list. This bond is available to wholesale clients only and has a final legal maturity on 23 December 2020.  It is available in $10,000 minimum parcel sizes and recently issued in December 2013.

Global Switch is a property business; offering design specific assets which meet the unique requirements of data centres for its clients.

The bond traded actively during its first week on our direct bond list. Stock remains in excellent supply with FIIG very well positioned to fill client buy orders. The current indicative offer on Global Switch is 5.63%.

Other credit margins and trading activity

Trading margins followed yields and fell in response to the Fed reducing its bond purchasing program, but ended the week slightly higher and have continued to rise early this week. The Australian ITRAXX 5-year credit index, at around 109bps, is about ten points higher than early last week. Silver Chef September 2018 margin contracted 6bps after the FOMC meeting to then reverse 4bps by week’s end.

Inflation linked assets had an active week last week with $15.5m in turnover recorded across the asset type. The Sydney Airport capital index bonds (CIBs) once again proved the standout with $5m and $1.5m trading across the 2020 and 2030 lines respectively. Both lines are currently available with current indicative offer levels below:

  • Sydney Airport November 2020: 6.25%
  • Sydney Airport November 2030: 7.00%

The index annuity bond (IAB) space was equally active as excellent supply in many of our favourite names prompted trading. Novacare April 2033 proved most popular as limited volume became available from the institutional sector, which was quickly swallowed by pent-up demand. Supply remains available in the names below with listed current indicative offer levels:

  • JEM NSW Schools February 2031: 6.00%
  • JEM NSW Schools November 2035: 6.30%
  • MPC Funding December 2033: 6.15%

The recent new Bendigo and Adelaide Bank Jan 2019 floating rate note (FRN) saw another strong week in secondary trading, topping our list of most traded securities. Supply is currently available, however it is likely to become difficult to source in the near future as stock remains well bid. Bendigo and Adelaide’s indicative offer level is currently at a modest premium of +232 basis points over swaps.


Offer levels are indicative as at 04 February 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.