Yield direction and volatility
Yields traded on a narrow range over the week, drifting higher at the beginning of the week to reverse their position midweek and creep lower with safe haven flows. It was a turbulent week in the US equities market as the Nasdaq experienced its largest drop since November 2011 as tech stocks were aggressively sold off on concern valuations were too high. This was also despite strong jobs data out of the US, with jobless claims lower than the prior week. The US Federal Reserve released its meeting minutes, playing down the hawkish tone previously set at which interest rates would raise.
Closer to home, Australia posted a drop in the unemployment number to 5.80% as 18,000 jobs were added in March, while tomorrow the minutes from the Reserve Bank of Australia meeting are eagerly anticipated. The 5 and 10 year benchmark swap rates dropped 3-4 basis points (bps) over the week, to close the week at 3.66% and 4.36% respectively. The 5 and 10 year Commonwealth government yields lowered 3-6bps to finish the week in at 3.39% and 4.02%.
Trading margins on fixed and floating corporate debt
Last week the Mackay Sugar Limited April 2018 line traded 10bps tighter compared to the prior week as the bond became available to retail clients. With access to this bond opening up to more clients, it became even more popular than ever and is expected to tighten further with no sign of demand slowing.
Non-AUD issues have been the big movers in terms of credit spread. In particular a number of our favourite Tier 1 issuers (Swiss Re, Rabo and AXA) trading in GBP have recently caught a strong bid from institutional clients. For clients holding Tier 1’s in GBP now is a good time to re-evaluate holdings and potentially secure strong holding period returns.
A year on since being issued, the Mackay Sugar Limited April 2018 line seasoned becoming available to retail clients and added to the DirectBonds list. The bond pays a semi-annual fixed rate coupon of 7.25% and has a final maturity on April 2018. The line was previously available in $50,000 minimum parcel sizes; however this has been reduced to $10,000 minimum parcel sizes. Mackay Sugar Limited is the second largest producer of raw sugar in Australia and the company earns revenue from sugar refining, electricity sales and other sugar bi-products.
Inflation linked bonds (ILBs)
The Sydney Airport capital index bonds (CIB) were once again the standouts in the inflation linked space last week. Strong demand coupled with lower interest rates saw the offer price increase over the week, prompting urgency among clients looking to get in early. Continued supply of the Sydney Airport 2030 line saw the offer price unchanged.
Listed below is a sample of available inflation linked assets:
Sydney Airport Nov 2020 CIB: 6.25%*
Sydney Airport Nov 2030 CIB: 7.00%*
MPC Funding Dec 2033 IAB: 6.00%*
JEM NSW Schools Nov 2035 IAB: 6.17%*
News regarding some of our most traded names
The Mackay Sugar Ltd (MSL) Apr 2018 fixed rate note became available to retail investors last week, making it the second FIIG originated issue to become eligible for retail status since the fixed rate Silver Chef Ltd Sept 2018 back in December. While supply became available in volume from clients switching into the CBL new issue, it was met with very strong demand from the retail sector. This made MSL FIIG’s most traded issue for the week with $8.5m in turnover across 137 trades. Demand for MSL currently outstrips supply by a significant margin, putting FIIG in an excellent position to fill client sell orders at and indicative current bid of 6.65%.
Tier 1s were active last week as some clients chose to lighten up on exposure in favour of the new CBL issue. The Swiss Re fixed and floating rate May 2017s proved the most popular switch targets, as strong bids from the institutional sector helped buoy the seller’s market. Similarly, the majority of FIIG’s unrated issues also saw some selling into the CBL. Below is a list of available bonds at current indicative offer yields:
Cash Converters Sept 2018: 7.14%
G8 Education Aug 2019: 6.85%
PAYCE Dec 2018: 8.57%
PMP Oct 2017: 7.35%
Silver Chef Sept 2018: 6.48%
*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.