Tuesday 11 February 2014 by FIIG Research Legacy

From the Trading Desk (11/02/14)

Yield direction and volatility

Yields rose last week as the rally in risk assets continued, despite the relatively poor jobs data out of the US. Yields were up around 16 basis points (bps) on the 5 year and 10 year benchmark swap rates, to end the week at 3.81% and 4.56% respectively. Similar movements were seen across Commonwealth government bond yields, as they increased 14-15bps to 3.46% and 4.15% by week’s end. Fixed rate bond yields also increased during the week, although the rise was limited due to a contraction in credit spreads.

US employment weak again, will Australia follow suit tomorrow?

For a second consecutive month, US employment figures were much weaker than anticipated (113,000 gain vs 180,000 expected) and for a second consecutive month the unemployment rate unexpectedly fell (6.6% vs 6.7% prior). Somewhat surprisingly, markets reacted counter-intuitively, with bond yields rising, credit margins tightening and equities rallying (after an extremely brief dip immediately following the release).

Tomorrow sees the release of Australian employment figures, where 15,000 jobs are expected to be added with an expected 5.9% unemployment rate. While US unemployment has been steadily trending lower since 2010, Australian unemployment reversed a similar trend in 2011 and has since been slowly rising; however, when put into longer term context, it could be argued that we are merely seeking the equilibrium witnessed prior to the GFC (see Figure 1 below).

Source: FIIG Securities
Figure 1

Other credit margins and trading activity

Trading margins traded tighter on corporate issuance over the course of the week, with the Australian 5-year ITRAXX index narrowing from a high of over 108.5bps to around 103.5bps. The Qantas April 2020 line contracted 16bps from the start of the week after Treasurer Joe Hockey said the government could still provide assistance to the airline.

The Sydney Airport 2020 and 2030 capital indexed bonds (CIB) dominated the week’s trading among inflation linked assets with $4.5m and $3.5m recorded across the two issues respectively. Supply of the Sydney Airports is still available and activity has not slowed, placing FIIG in an excellent position to fill client purchase orders. Current indicative offer levels are below:

  • Sydney Airport Nov 2020: 6.40%
  • Sydney Airport Nov 2030: 7.10%

Novacare’s 2033 index annuity bond (IAB) had a brief flurry of activity early in the week as demand worked its way through modest supply left over from the previous week’s trading. The JEM (CCV) June 2022 IAB traded well following supply from the institutional sector. Supply is currently available at an indicative offer level of 5.35%.

The Bendigo Adelaide Bank Jan 2019 floating rate note (FRN) enjoyed another week of strong trading with $7.5m in total turnover recorded over 43 trades. Making the Bendigo Adelaide issue FIIG’s most traded security for the third week running. The bond is still in ready supply however offer prices are slowly creeping higher. Bidding clients can expect an indicative offer level of +233 basis points.

FIIG originated issues also had a big week with five out of the six placing amongst our most traded securities. Activity was primarily driven by large supply of the Payce Dec 2018 fixed rate bond, which prompted switching opportunities out of other FIIG issues. FIIG currently has excellent access to PAYCE and modest access to the other FIIG originated names. Indicative offer levels are below:

  • Payce Dec 2018: 9.06%
  • Cash Converters Sep 2018: 7.20%
  • PMP Finance Oct 2017: 7.64%
  • Mackay Sugar Ltd Apr 2018: 6.62%


Offer levels are indicative as at 11 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.