Tuesday 17 June 2014 by FIIG Research Legacy

From the Trading Desk (17/06/14)

Yield direction and volatility

Yields drifted higher over the week on the back of strong data from the US and abroad, then slightly reversed to close marginally lower on Friday. Job openings in the US increased to an almost seven-year high as employers sought to add more workers to manage stronger demand. The number of positions waiting to be filled rose by 289,000 for the month. There was also strong jobs data out of the UK, with 345,000 jobs created in the three months to April - the strongest growth since records began in 1971. This caused the UK unemployment rate to sharply drop to 6.6%.

In Australia, the unemployment rate for May was released and was broadly in line with market expectations at 5.80%. The 5 year and 10 year benchmark swap rates dropped 1-4 basis points (bps) over the week, closing at 3.45% and 4.09% respectively. The 5 and 10 year Commonwealth government yields remained unchanged, opening and closing the week at 3.16% and 3.78% respectively.

MPC (Melbourne Convention Centre) indexed annuity bonds active again

Following several months of inactivity, the MPC 2025 and 2033 indexed annuity bonds have begun trading actively again. The 2025 issue is indicatively offered at CPI+2.55%, but the 2033 issue is offering very good relative value at an indicative yield of CPI+3.25%.

Both MPC bonds are available to wholesale investors in parcels of $10k.

New Direct Bond – Plenary Bond Finance

This week, the latest FIIG originated bond - Plenary Bond Finance Unit Trust - was added to the DirectBonds list and began trading in the market. The bond has a fixed rate of 7.50% p.a., paid quarterly, and is available to wholesale investors in $10k minimum parcel sizes. It has a legal maturity of June 2021. Plenary Group is a leading sponsor of Public Private Partnerships (PPPs) in Australia, with extensive history and experience in the development and management of PPPs.

While we welcome this addition to our DirectBonds list, we do not expect a large amount of secondary trading as the issue size was quite small ($35m) and the majority of stock is expected to be locked up in superannuation fund accounts for the foreseeable future.

New Indexed Annuity Bond – Boral Limited

FIIG has uncovered a large parcel in a relatively unknown indexed annuity bond, issued by Perpetual Trustee Company Limited and backed by a sale and leaseback of a Besser Block manufacturing property to Boral Limited.

The bond is not part of the DirectBonds list and as such is only available in parcels of $500k (original face value), although at the current indicative offer level of CPI+3.25%, this is an investment of only around $340k. With only $10.1m left of a $20.1m issue ($10m has been bought back by the issuer), this security should be considered relatively illiquid, but is offering an attractive inflation-linked yield for a relatively short-dated inflation linked product.

Research and cashflow analysis can be provided on request.

Other credit margins and trading activity

Inflation linked assets experienced an active week as $17m in turnover was recorded across the asset class. The Envestra August 2025 capital indexed bond (CIB) stood out as a switch target for clients lightening their exposure to the shorter dated Electranet August 2015 CIB, as the term to maturity of Envestra offers a long-term hedge against inflation risk. Due to the tightly held nature of the Envestra CIB, supply tends to be sporadic, leaving FIIG well positioned to execute client sell orders.

The Sydney Airport November 2020 and 2030 CIBs saw good two-way flow, again placing as the top traded inflation linked securities for the week. Supply has not wavered in either issue, leaving both assets available at the below indicative offer yields:

  • Sydney Airport Nov 2020: 6.00%
  • Sydney Airport Nov 2030: 6.70%

‘New style’ lower tier 2 floating rate notes (FRNs) have seen a substantial rally recently which continued last week. Bendigo and Adelaide Bank January 2019s and Insurance Australia Limited March 2019s have been the biggest movers after large scale buying interest from the institutional sector. FIIG clients have mirrored this demand, placing both securities among our top traded bonds for the week. Supply is still available; however trading margins have been creeping tighter on a daily basis.

The Qantas May 2022s continue to trade very well as the higher coupon yield relative to the Qantas April 2020 issue and the coupon step-up clause makes for an attractive switch alternative. Whilst the 2022s are only available to wholesale clients, the retail eligibility of the 2020s has helped buoy demand of the shorter dated security. Currently available at an indicative offer yield of 6.62%, the Qantas 2020s place among the highest yielding securities available to the retail investor. Supply is also still available in the 2022s, indicatively yielding 7.12% to wholesale clients.


Market levels are indicative as at 17 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.