Tuesday 10 June 2014 by FIIG Research Legacy

From the Trading Desk (10/06/14)

Yield direction and volatility

Yields rose last week, peaking mid-week and then slightly reversing to close the week a few basis points (bps) higher than the open. Australian retail sales were released for April, rising 0.2% for the month, coming in higher than March, but missing expectations of 0.3%. The largest contributor to the lift was department stores, followed by cafes, restaurants and takeaway foods. Gross Domestic Product (GDP) was released, coming in at 3.5% - the fastest pace GDP has expanded in two years. The March quarter growth was attributed to mining exports and housing investment, followed by financial services.

Abroad, the European Central Bank (ECB) met last week, introducing new stimulus policies to target slow inflation. Its deposit rate was cut to minus 0.1%, making the institution the first major central bank to turn to negative rates. It also reduced the refinancing rate and offered as much liquidity to commercial banks as needed as long as the lending was tied to households and businesses.

In the US, new claims for unemployment aid (jobless claims) remained low at 312,000 for the last week of May.

The 5 year and 10 year benchmark swap rates rose 6 bps over the week, closing at 3.44% and 4.12% respectively. There were similar increases across the 5 and 10 year Commonwealth government yields, which gained 1-7 bps during the week to finish at yields of 3.15% and 3.77%.

Australian employment for May is due tomorrow morning (Thursday), with expectations for the unemployment rate to remain unchanged at 5.8%. 

Other credit margins and trading activity

Sydney Airport enjoyed yet another active week as continued supply in both the 2020 and 2030 inflation linked bonds prompted volume trading, placing the securities as the top two traded bonds for the week. Availability of stock is intermittent, but we have been able to fill client orders in both bonds over time. Current indicative offer yields are as follows:

  • Sydney Airport Nov 2020: 6.05%
  • Sydney Airport Nov 2030: 6.73%

The recently issued Adani Abbot Point Terminal May 2020 fixed coupon bond has traded actively since entering the secondary market. Last week saw turnover of $2.5m push the offer to a modest premium. FIIG has good access to stock and can fill purchase orders at an indicative current offer of 5.95%.

The Qantas April 2020 and May 2022 fixed rate bonds had a tumultuous week as Qantas Airways Ltd announced a new issue maturing in November 2021. The announcement prompted sales of the 20s and 22s in favour of joining the book build of the new issue, causing yields to rise. Yields retracted later in the week after the oversubscribed book build left a surplus in demand for Qantas credit. The 2021 issue is expected to be added to the Direct Bond list upon settlement. Both 2020 and 2022 issues are currently available at the below indicative offer yields:

  • Qantas Apr 2020: 6.64%
  • Qantas May 2022: 7.24%


Market levels are indicative as at 10 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.