Tuesday 11 March 2014 by FIIG Research Legacy

From the Trading Desk (11/03/14)

Yield direction and volatility

As the situation in the Ukraine cooled and the threat of eminent conflict eased, yields increased while the markets reversed their earlier risk-off position, also buoyed by strong US jobs data released late last week. Markets were less jittery after a proposal was approved for the Crimean region to hold a referendum on March 16th, and the focus turned back to economic data with data showing jobless claims in the US fell to the lowest in three months. The yields on the 5 and 10 year benchmark swap rates increased 15-16 basis points (bps) to close the week at 3.71% and 4.49% respectively. Similarly there was an increase of 19bps across both the 5 and 10 year Commonwealth government bond yields as they finished the week at 3.44% and 4.17%.

Qantas continues to cheapen

The trading margin on the Qantas April 2020 bond continued to widen for a second week after there was no positive news flow for the carrier and Tony Abbott ruled out guaranteeing its debt in favour of allowing more foreign investment in the airline. Qantas acknowledged there is a ‘limited chance’ of these changes to the Act getting through the Senate.  In response the April 2020 bond traded 23bps wider to end the week at a more settled 6.80%.

New DirectBond

G8 Education Limited floating rate note (FRN) was officially added to our DirectBonds list last week as it commenced trading in the secondary market. The bond is available to wholesale clients only, and pays a quarterly coupon of 3.90% over the 3 month BBSW rate. It has a call date of March 2016 and a final legal maturity of March 2018. The bond can be purchased in minimum parcel sizes of $10,000. G8 Education Ltd is Australia’s largest publicly listed operator of childcare centres with 234 childcare centres in Australia.

The FRN made a strong start in secondary trading this week, no doubt spurred by the demand left over from oversubscription in the primary market. The bond was FIIG’s second most highly traded security with $6.5m in turnover. FIIG is well positioned to fill client buy orders at an indicatively offered trading margin of +310bps.

Other credit margins and trading activity

Trading in the inflation linked bond (ILB) sector was very active last week with the Envestra August 2025 taking the top spot on our most traded issues list with $8.5m of turnover across 92 transactions. Traditionally an extremely difficult bond to source, the Envestra became available in large size as favourable market equilibrium for current holders was established. Supply was quickly spoken for by backlogged demand which has been building for months.

The Sydney Airport 2020 & 2030 lines were the most popular switch targets for clients selling out of the above mentioned Envestra, prompting turnover of $12m across the two names.

FIIG’s other originated issues have continued to trade well with good two way flow recorded across each of our names. Current indicative offer yields on a selection of fixed rate bonds are:

  • PAYCE December 2018: 8.72%
  • PMP October 2017: 7.38%
  • G8 August 2019: 6.84%


Offer levels are indicative as at 11 March 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.