Monday 17 March 2014 by FIIG Research Legacy

From the Trading Desk (17/03/14)

Yield direction and volatility

Yields dropped last week as the planned referendum in Crimea drew closer, with markets becoming jittery in response to the US and Germany calling for the vote to be cancelled. There was a flight to safer investments, with the yield on the 5 and 10 year benchmark swap rates falling 7-10 basis points (bps) to close the week at 3.66% and 4.41% respectively. Similarly there was a decrease of 11-17 bps across the 5 and 10 year Commonwealth government yields as they finished the week at 3.35% and 4.04%.

Thursday saw the release of strong jobs figures in Australia with payrolls increasing by 47,300 in February. The unemployment rate was unchanged at 6.0% and the previous month’s figures were also revised higher, from the -3,700 originally reported to +18,000. Of even greater importance, full time employment rose 80,500 (offset by part time fall of around 33,300). This is the biggest increase in full time employment since 1991 and the second largest rise on record.

While a slowing economy in China and consequently a drag on the mining industry will have an ongoing negative effect on the Australian economy, the changing direction of inflation and employment appear to be showing the first signs of a meaningful recovery, and the short term direction of interest rates is somewhat cloudy. At this juncture, the best estimate is status quo until more clarity is available through other economic indicators. With the steepness of the yield curve easing from its highs, a balanced portfolio (between fixed rate, floating rate, and inflation linked assets) would seem a prudent strategy.

New DirectBond

FIIG added the recently issued FRN from Westpac Banking Corporation to the Direct Bonds list last week. The bond pays a quarterly coupon of 2.05% over the 3-month BBSW rate and has a call date of 14 March 2019.  It is available to wholesale clients only and in minimum parcels sizes of $100,000. This line has a final legal maturity in March 2024. Westpac is one of the largest banks in Australia and is one of the ‘Big 4’ full-service banks which dominate the county’s financial sector.

Other credit margins and trading activity

The newly issued Insurance Australia Ltd (IAL) FRN enjoyed an active secondary market last week as residual demand from the substantially over-subscribed issue spurred offer levels higher. FIIG transacted a total of $12m of trades in IAL, making it the most traded asset by volume for the week.

When news of the new IAL issue came to market, the Bendigo and Adelaide Bank 2019 Floating Rate Note (FRN) traded 9bps wider.  It was also heavily traded last week as it was seen to offer good value at its new levels post IAL issue and it remains the highest yielding FRN available to retail clients.

Trading among inflation linked assets was active last week as the appearance of the Royal Women’s Hospital (RWH) June 2033 indexed annuity bond (IAB) caught the eye of many wholesale investors. The modest volume on offer was quickly spoken for, leaving behind residual demand for RWH.

Elsewhere in the IAB space, Praeco August 2020 became available as some clients chose to switch exposure into the longer dated MPC Funding December 2033. Due to the relatively small issue size of the Praeco IAB, supply is not expected to last long.

A selection of currently available inflation linked assets are listed below, pricing is an indicative offer yield to maturity:

  • MPC Funding December 2033 IAB: 6.23%
  • Praeco August 2020 IAB: 5.15%
  • Sydney Airport November 2020 CIB: 6.40%
  • Sydney Airport November 2030 CIB: 7.00%


Offer levels are indicative as at 17 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.