Yield direction and volatility
Disappointing US retail data and dovish sentiment in Europe kept yields low last week, as cautious investors moved to less risky assets. US retail sales increased only 0.1% last month, compared to the market expectations of a 0.4% advance for April. US consumers frequented malls and restaurants less over the period after gaining the most in four years the month prior.
European bonds rallied on speculation the European Central Bank (ECB) will introduce a range of stimulus measures, as data showed the Euro-region economies stalled last quarter with the gross domestic product growing only 0.2% versus the expected rate of 0.4%. The 5 and 10 year benchmark swap rates moved 7-12 basis points (bps) lower over the week, closing at 3.44% and 4.08% respectively. Similarly the 5 year and 10 year Commonwealth government yields dropped 6-11 bps to end the week at 3.16% and 3.72%.
New Issue - Adani Abbot Point Terminal
FIIG are sole arrangers for Adani Abbot Point Terminal (AAPT) in the issuance of a six year fixed coupon bond at an attractive 6.10%. This marks our first investment grade issue and is attracting a good level of demand. The offer is expected to remain open until close of business today (Wednesday, 21 May).
The yield on this bond is up at least 50-100bps over comparable bonds and we expect this to trade well in the secondary market. Figure 1 shows a comparison between the new AAPT bond and its fixed coupon peers.
Figure 1
Other credit margins and trading activity
The recently issued Qantas Airways Limited May 2022 fixed rate line traded 6bps tighter since issuance, as clients moved out of the shorter dated 2020 maturity into the longer dated bond. The May 2022 line was added to the DirectBond list this week, and is available to wholesale clients in minimum parcel sizes of $10,000. FIIG is well placed to execute switches between the two lines.
Sydney Airport was again the top performer among inflation linked assets with the 2020 and 2030 capital index bonds (CIB) recording a combined turnover of $6.5m for the week. Supply has been good in recent weeks, however, offers from the institutional sector are becoming increasingly hard to find. Demand remains strong, placing FIIG in a good position to execute client offers. Envestra August 2025 CIB also traded well last week as the last remnants of current supply were sold. Envestra is typically difficult to source and, as such, future supply is uncertain.
Supply in the inflation annuity bond space has been scarce of late. One of our FIIG favourite issues that is currently available is the JEM NSW Schools February 2031, currently indicatively offered at a yield of 5.60%.
The above mentioned Qantas May 2022 fixed rate bond traded actively last week. The relatively high coupon attracted a lot of switches from the shorter dated 2020 Qantas line, making both issues our two most traded securities for the week. FIIG is well placed to further execute this switch with indicative current yields as follows:
- Qantas Apr 2020 (Bid): 6.90%
- Qantas May 2022 (Offer): 7.30%
Demand for recently issued new-style lower Tier 2 securities has been consistently strong for the past few weeks. Trading margins on Insurance Australia Ltd March 2019 (IAL) and Bendigo Adelaide Bank Jan 2019 (BEN) have been creeping tighter on a daily basis as institutional offers keep pace with the demand. Both securities placed among our most traded issues. Supply is currently available at the below indicative levels.
- IAL Mar 2019: +227bps
- BEN Jan 2019: +205bps
Notes:
Offer levels are indicative as at 20 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.