Tuesday 01 July 2014 by FIIG Research Legacy

From the Trading Desk (01/07/14)

Yield direction and volatility

For yet another week bonds continued to rally, as yields moved lower despite comments from the Fed Bank of St. Louis President James Bullard, who said interest rates may increase as early as March next year. Bullard said that he was in favour of raising the benchmark rate in the first quarter of 2015 as the Federal Open Market Committee (FOMC) is closer to its goals for full employment and stable inflation in the US. At the last FOMC meeting in June, minutes stated rates are to remain near zero for a ‘considerable time’ after the bond purchasing program ends.

The 5 year and 10 year benchmark swap rates dropped 6-11 basis points (bps) over the week, closing at 3.32% and 3.94% respectively. The 5 and 10 year Commonwealth government yields followed trend and moved 12-16bps lower to close the week out at 2.95% and 3.54%.

As widely expected, the Reserve Bank of Australia left rates unchanged at 2.50% in its monthly meeting yesterday. In its largely unchanged accompanying statement, Governor Glenn Stevens commented that financial conditions and monetary policy remain very accommodative and “markets appear to be attaching a very low probability to any rise in global interest rates over the period ahead”. Mr Stevens reiterated his comment that the Australian dollar remains high by historical standards, so is not aiding balanced growth in the economy, as it might otherwise. 

Wyuna 2022 IAB added to DirectBonds

This week the Wyuna Water Pty Limited 2022 indexed annuity bond (IAB) was added to the DirectBonds list. The bond is available in $10,000 minimum parcel sizes to Wholesale clients and has a maturity of March 2022. The bond pays a quarterly inflation linked coupon and is amortising. Wyuna Water Pty Ltd is a special-purpose vehicle, established for a Water Filtration Agreement with Sydney Water Corporation to design, build, and operate two water filtration plants in Illawarra and Woronora in Sydney for 25 years from commissioning.

Other credit margins and trading activity

Inflation linked securities were by far the most popular asset type as total turnover reached $70m after some very active trading. The standout of the week was Civic Nexus September 2032 indexed annuity bond (IAB) after a large volume of stock became available at an attractive level. Ongoing access to the Civic Nexus is difficult to forecast; FIIG remains able to fill small parcel orders, however offer yields are expected to fluctuate.

The new Wyuna Water March 2022 IAB (see above) traded for the first time late last week as large volume flowed through from the institutional sector, resulting in $9.5m of turnover. Wyuna joins a list of IABs currently available through FIIG, indicative offer yields are shown below:

  • Australian National University Oct 2029: 4.90%
  • JEM NSW Schools Nov 2035: 5.65%
  • MPC Funding Dec 2033: 5.60%
  • Wyuna Water Mar 2022: 5.50%

The Sydney Airport November 2020 and 2030s again proved the favourite among capital index bonds (CIBs). Persistent demand has spurred heavy trading in the two assets for a number of weeks, with both securities frequently placing among our most traded. Last week saw the 2020’s favoured against the 2030’s as some clients looked to shorten duration. Both issues are available; current indicative offer yields are listed below

  • Sydney Airport Nov 2020: 5.85%
  • Sydney Airport Nov 2030: 6.68%

Late last week saw some selling action in the Praeco fixed rate Jul 2020 on the back of a downgrade by Moody’s rating agency. The move caused a flow of funds into other similar dated fixed rate corporate, such as the Qantas April 2020. Praeco remains on negative watch by Moody’s.


Market levels are indicative as at 30 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.