Tuesday 13 May 2014 by FIIG Research Legacy

From the Trading Desk (13/05/14)

Yield direction and volatility

Strong domestic employment data for April was released last week, which kept yields lower over the week, while in the US there was continued economic improvement. The 5 and 10 year benchmark Australian swap rates both dropped 5 basis points (bps) over the week, closing the week at 3.48% and 4.15% respectively. Likewise, there was a 5bps drop in the Commonwealth government yields, as the 5 year yield finished the week at 3.21% and the 10 year yield closed at 3.82%.

The Australian April jobless rate came in at 5.8%, unchanged from the prior month, although better than market expectations of an uptick to 5.9%. The number of people employed increased by 14,200 while the number of unemployed people decreased by 400, seasonally adjusted.

Meanwhile in the US, the service industries expanded at the fastest pace in eight months, with the Institute for Supply Management’s (ISM) non-manufacturing index rising to 55.2, up from 53.1 for the prior month.  Retailers, restaurants and construction companies were some of the 14 service industries that reported growth last month and signalled faster growth ahead.

The RBA Monetary Policy Statement, released on Friday, cited a positive growth outlook in China, Japan, and the US, supporting the resources sector, and continued strength in the housing market. Employment is seen as improving, albeit at a very slow pace, and inflation is forecast to remain consistent with the RBA target of 2%-3%. In balance, the current level of interest rates is expected to be appropriate “for some time yet”.

Qantas issues new eight-year bond

Earlier this week Qantas Airways announced a new 7.75% bond maturing 19 May 2022. The bond was issued at a discount price of 98.76 (7.96% yield), but quickly traded back up to around par ($100). We expect this bond to be added to our DirectBonds’ list for wholesale clients later this week and it presents two distinct opportunities for our clients.

For wholesale clients, this offers an attractive increase in yield (74bps as I write) over the existing 2020 bond.

For retail clients, the existing 2020 bond has cheapened by 20bps as a result of the new issuance and is currently available at an indicative yield of 6.55%.

Other credit margins and trading activity

The Sydney Airport capital indexed bonds (CIB) continued to be the top performers in the inflation linked space last week as supply in the 2030 line drove clients to switch exposure from the shorter dated 2020 for the pickup in yield. The switch resulted in ample supply of the 2020, for which demand has been constant, pushing turnover across both securities to $6m for the week. Both lines are currently available, however falling interest rates could see offers become more expensive.  Current indicative offer yields are below:

  • Sydney Airport Nov 2020: 6.10%
  • Sydney Airport Nov 2030: 6.85%

Elsewhere in the inflation space, Envestra Aug 2025 has traded actively as supply continues to trickle through from the institutional market. Envestra is typically a very hard-to-source line of stock, so availability is expected to be short-lived. Among inflation annuity bonds (IABs) the JEM NSW Schools 2031 continues to offer value at an indicative offer level of 5.70%. A good supply of stock is currently accessible.

Continued institutional buying interest among Tier 1 securities again saw the Rabo Dec 2014 fixed and floating rate lines being the most actively traded issues for the asset type. The fixed line capped our most traded securities list at $18m with the floating coming in at $7.5m in total turnover for the week.

Profit taking among holders of short dated Tier 1 securities saw buying interest towards higher yielding, medium dated issues such as the CBL Apr 2019 fixed rate bond. The recent downward trend in interest rates coupled with continued interest in high yield debt has seen a rally among many of our favourite fixed rate bonds.

Offers among Lower Tier 2 floating rate notes (FRNs) have begun steadily trading tighter. The BENAU Jan 2019 is a prime example, as strong retail demand continues to squeeze the trading margin tighter. BENAU is currently offered at an indicative trading margin of BBSW+2.16%.


Offer levels are indicative as at 13 May 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.