Bonds rally on concerns about US economy, Ukraine conflict
Bonds rallied last week off the back of a flight to safety, as the tension in the Ukraine continued and US housing data came in at an eight-month low. The US and EU were expected to impose fresh sanctions on Russia as neither side made any progress in de-escalating the situation. Meanwhile in the US, housing data came in weak, with sales of new homes decreasing 14.5% to 384,000 annualised. This is due to record house prices and higher mortgage rates making properties less affordable.
In Australia the Consumer Price Index (CPI) for the March quarter was released, rising 0.6%, which was considerably lower than market expectations of a 0.9% increase. The CPI rose 2.90% through the year to the March 2014 quarter. The 5 and 10 year benchmark swap rates dropped 5-8 basis points (bps) to finish the week at 3.55% and 4.27% respectively. The 5 and 10 year Commonwealth government yields lowered 5-7 bps to close the week out at 3.29% and 3.94%.
Wednesday night will see the outcome of the FOMC meeting in the US, where the Quantitative Easing (QE) program is expected to be pared by another $10 billion to $45 billion.
Qantas 2020 now available for retail clients
Having passed its one year anniversary since issue, the Qantas 2020 fixed coupon bond is now available to retail clients. At an indicative yield of 6.50%, this is the second highest yielding security in our universe for retail clients (second only to the Sydney Airport 2030 inflation linked bond) and well worth considering for retail portfolios.
One of the stand-out opportunities that has surfaced as a result of this development is a switch from DBNGP 2019 into this security for an increase in yield of over 110 basis points.
CBL 2019 added to DirectBonds
The recently FIIG issued CBL Corporation Limited April 2019 line was added to the Direct Bonds list recently, becoming available to trade in the secondary market. It pays a fixed rate coupon of 8.25% semi-annually and has a legal maturity in April 2019. It is available to Wholesale investors only, and in minimum parcel sizes of $10,000. CBL Corporation Limited is a privately owned insurance and reinsurance group that has been operating for more than 40 years. The issue was met with strong demand which has pushed the price to a modest premium. FIIG is currently well positioned to fill client purchase orders at an indicative offer yield of 7.82%.
Other credit margins and trading activity
The Insurance Australia Limited (IAL) March 2019 floating rate note continued to trade tighter last week, contracting 9 bps over the week. It continues to tighten as it remains a well-bid FRN offering.
Mackay Sugar ltd (MSL) enjoyed a relatively good week as its popularity among retail investors remained strong. The second of FIIG’s originated issues to become eligible for retail investors, MSL was our most traded security in a quiet market last week, with $1m in turnover. Supply in MSL remains decent; as does supply in many of our other FIIG originated issues shown below (pricing is shown as a current indicative offer yield).
- CCV Sept 2018: 7.17%
- G8 Aug 2019 FCB: 6.90%
- G8 Mar 2018 FRN: 6.56%
- MSL Apr 2018: 6.30%
- PMP Oct 2017: 7.35%
Trading among inflation linked assets was subdued due to the short trading week. Attractive offers remain in many of our favourite names. Current indicative offer yields are listed below.
- JEM NSW Schools 2031 IAB: 5.85%
- JEM NSW Schools 2035 IAB: 6.10%
- Sydney Airport 2020 CIB: 6.20%
- Sydney Airport 2030 CIB: 7.00%
Notes:
Offer levels are indicative as at 29 April 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.