Tuesday 03 June 2014 by FIIG Research Legacy

From the Trading Desk (03/06/14)

Yield direction and volatility

Bonds rallied last week, with Portugal, Spain and Italy leading a rally in European 10 year bonds and the US 10 year treasury reaching its lowest level since June last year. There is mounting speculation there will be policy action this week from the European Central Bank, with a board member commenting the bank was preparing policies to deal with low inflation. The US economy contracted 1% in the first quarter of the year, coming in weaker than market expectations of 0.1%. The GDP contraction, the first in three years, was attributed to poor weather. However there was offsetting positive data out of the US last week, with pending home sales rising 0.4% for the month and durable goods orders increasing for a third month in April.

The Reserve Bank of Australia met for the month on Tuesday this week, keeping the cash rate unchanged at 2.50% in-line with expectations. The language was much the same as last month, citing declining resource sector investment and a continued high unemployment rate to keep interest rates low for some time.

The 5 year and 10 year benchmark swap rate dropped 7-9 basis points (bps) over the week, closing at 3.36% and 4.01% respectively. There was similar decrease across the 5 and 10 year Commonwealth government yields, which lost 5-8bps during the week to finish at yields of 3.09% and 3.66%. 

Adani Abbot Point Terminal – new DirectBond and comparing favourably to its peers

The newly FIIG issued Adani Abbot Point Terminal (AAPT) fixed rate line was direct bonded last week as it traded in the secondary market. The bond is available to wholesale clients only in minimum parcel sizes of $10,000 and pays a fixed rate coupon of 6.10% semi-annually. The line has a maturity date of May 2020. Adani is a globally integrated infrastructure player with businesses spanning coal trading and mining, oil and gas exploration and ports among others.

Investors who hold the following fixed coupon bonds, which I would categorise as having similar risk profiles to AAPT, can improve yield switching into the new AAPT bond:

  • Downer 29Nov18: improve yield by 73bps
  • Global Switch 23Dec20: improve yield by 45bps
  • APT Pipelines 22Jul20: improve yield by 57bps
  • Lend Lease 13May20: improve yield by 47bps
  • DBNGP Finance 11Oct19: improve yield by 69bps
  • Brisbane Airport  09Jul19: improve yield by 141bps

Other credit margins and trading activity

The Sydney Airport capital indexed 2020s and 2030s enjoyed a massive week last week, taking out the top two places in our most traded issues list with $35m of turnover across 177 trades. Declining interest rates have seen offer yields drop almost 10bps over the past two weeks in both bonds. This prompted many clients to take the opportunity to crystallise gains and/or switch exposure to other corporate issues, while others flocked to the Sydney Airports seeking inflation protection. The high volume of two-way activity easily pushed these two securities to become the highest performing issues for the week.

While paling in comparison to the activity of the Sydney Airports, the Envestra and Electranet capital indexed bonds also saw decent trading during the week. Switches from the Electranet Aug 2015s to the Envestra Aug 2025s were commonplace among clients looking for real inflation protection in the longer dated bond, while Electranet was favoured by retail clients looking for alternatives to low yielding term deposits.

Qantas was again a popular target as the previous weeks trend of switches to extend duration continued. Wholesale clients had the opportunity of moving from the Apr 2020 line into the higher yielding May 2022, while the 2020s also saw high demand as it places as one of our highest yielding bonds available to retail investors. FIIG is well positioned to facilitate the switch outlined above, as well as outright bids in both lines.


Offer levels are indicative as at 03 June 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.