Tuesday 24 June 2014 by FIIG Research Legacy

From the Trading Desk (24/06/14)

Yield direction and volatility

Last week yields moved after US inflation data came in higher-than-expected, but ended the week lower in response to the Federal Open Market Committee (FOMC) trimming its bond buying program.  The US inflation rate rose 0.4% for the month of May, higher than the 0.2% expectation.

The FOMC trimmed its quantitative easing program by $10bn for a fifth straight meeting to $35bn. US Fed Chair Janet Yellen said the Fed will ‘reduce the pace of asset purchases in further measured steps’ after stating growth is bouncing back and the job market is improving. The asset purchases are expected to end later this year.

The 5 year and 10 year benchmark swap rates both dropped 4 basis points (bps) over the week, closing at 3.37% and 4.02% respectively. The 5 and 10 year Commonwealth government yields followed trend and moved 7-8bps lower to close the week out at 3.05% and 3.67%.

Qantas 2021 added to DirectBonds

This week the most recently issued bond from Qantas Airways Ltd was added to the DirectBonds list. The bond pays a fixed coupon of 7.50% semi-annually and is available to wholesale clients only. It has a legal maturity of June 2021 and is available in minimum parcel sizes of $10,000.  Qantas has grown to be Australia’s largest domestic and international airline, with a market share of circa 65%.

FIIG has ample access to supply of this bond, currently offered at a yield of 6.99%.

Other credit margins and trading activity

Inflation linked trading was a major focus last week after $26m was traded across the asset class. MPC Funding Ltd December 2033 inflation annuity bond (IAB) was the standout after strong demand coupled with a high relative offer yield led it to become our most traded security for the week. MPC still remains available; however the strong demand caused the yield to gradually contract over the course of the week. FIIG can currently execute purchase orders at an indicative offer yield of 5.78%.

Elsewhere in the inflation linked space, the Sydney Airport capital indexed bonds (CIB) placed high on our list of most traded securities, as good supply in both issues satisfied demand. Since then, the Sydney Airport 2020 issue has become scarce, putting FIIG in a good position to execute switches into the 2030 bond for clients looking to extend duration and pick up extra yield.

The recently issued Plenary Group Pty Ltd fixed coupon bond began secondary market trading last week. Transaction volume was subdued as the relatively small issue size of $35m resulted in a shallow offer market. These conditions pushed the Plenary bond to a modest premium as the limited supply was quickly sold. Given the issue’s size, trading in this security is expected to be limited.

Last week ANZ launched a $750m foray into the ‘new-style’ Lower Tier 2 (LT2) market, making it the second such deal to comply with Basel III rules from a major Australian bank. The new issue comes as other new style LT2 floating rate notes (FRN) have enjoyed a strong rally in recent weeks; the most notable of which are the Insurance Australia Ltd March 2019, tightening more than 10bps. The new ANZ issue itself has rallied substantially in the secondary market despite not settling until 25 June. FIIG has access to the new style AUD LT2 with current indicative offer levels below:

  • Bendigo Adelaide Bank Jan 2019: BBSW+1.88%
  • Insurance Australia Ltd Mar 2019: BBSW +1.90%
  • Westpac Banking Corp. Mar 2019: BBSW +1.38%


Market levels are indicative as at 24 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.