Yield direction and volatility
Breaking the current trend, yields rose last week as solid US employment data offset dovish comments from Reserve Bank of Australia governor Glenn Stevens. The US unemployment rate fell from 6.3% to a six year low of 6.1% after 288,000 jobs were added for the month of June, which was markedly above market expectations. This boosted speculation that growth is strong enough for the Federal Reserve to consider higher rates in 2015.
In Australia, Glenn Stevens spoke at a conference of economists, commenting that low interest rates had been having their intended impact but suggested that the RBA retained scope to cut again if need be. Mr Stevens also commented that investors are currently underestimating the probability of a “significant fall” in the Australian dollar.
The 5 year and 10 year benchmark swap rates closed 1-2 basis points (bps) higher over the week, closing at 3.28% and 3.94% respectively. The 5 year Commonwealth government yield closed 1 bps lower at 2.94% while the 10 year Commonwealth government yield closed 5 bps higher at 3.59% for the week.
ANZ floating rate note added to DirectBonds
The recently issued ANZ Lower Tier 2 (LT2) floating rate note (FRN) was added to the direct bonds list late last week, spurring a flurry of trading activity. The bond, which has a call date of June 2019 and a legal maturity in June 2024, pays a quarterly coupon of 1.93% over the Bank Bill Swap Rate (BBSW) and is available to both retail and wholesale investors in minimum parcel sizes of $10,000.
The ANZ is the newest addition to the AUD ‘new style’ LT2 market and comes at a time when the sector is enjoying a substantial rally. Issued at a trading margin of +193bps, the security has tightened more than 50bps in two weeks to its current indicative offer of +140bps. Demand continues to flow in with FIIG well positioned to fill client purchase orders.
Antares Energy issues convertible bond
ASX listed oil and gas company Antares Energy Limited last week settled a $19.5m placement of convertible notes for which FIIG Securities was Sole Manager. The placement, which comprised 9.75 million notes at $2.00 each, was oversubscribed. It commenced trading on the ASX last week under the code AZZGA. The convertible notes pay a 10% coupon on a quarterly basis and are direct, unsecured, unsubordinated obligations of Antares and rank equally with other ordinary unsecured creditors and above ordinary shares prior to their conversion into equity.
Other credit margins and trading activity
Trading of inflation linked securities was quiet relative to recent weeks as supply of the ever-popular Sydney Airport capital indexed bonds (CIB) finally began to decrease. The Sydney Airports have been a favourite among clients for months with active two way deal flow ensuring a deep market for clients on both sides of the trade. Demand is still very strong in both the 2020 and 2030 issues, putting FIIG in a good position to execute client sell orders.
In the inflation annuity bond (IAB) space the MPC Funding December 2033 was the standout after supply of the Civic Nexus and Wyuna Water IABs came to an end. MPC’s are still available in volume at an indicative offer yield of 5.70%.
A delayed reaction to the news of the Praeco Pty Ltd credit downgrade by ratings agency Moody’s saw some heavy trading in the July 2020 fixed coupon bond (FCB) last week. The bond took out the top spot as FIIG’s most traded security after clients turned net sellers prompting $6m of turnover.
Qantas credit had a very active week as many clients moved exposure from the 2020 issue into the 2021 and 2022 securities in favour of the pickup in yield. This led to a decent two-way market in the 2020’s provided a relatively high yielding option for retail investors. There is good supply in each of the Qantas issues at the moment with current indicative offers listed below:
- Qantas April 2020: 6.54%
- Qantas June 2021: 6.94%
- Qantas May 2022: 7.01%
Notes:
Market levels are indicative as at 07 July 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.
Key terms
Basis points (bps)
The basis point is commonly used for calculating changes in interest rates, equity indices and the yield of a fixed income security. The relationship between percentage changes and basis points can be summarised as follows:
Bank bill swap rate (BBSW)
A compilation and average of market rates supplied by domestic banks in regard to the specific maturities of bank bills. BBSW is calculated at ten o’clock every morning and compiled by AFMA.
The purpose of BBSW is to provide independent and transparent reference rates for the pricing and revaluation of Australian dollar derivatives and securities.
Call date
The date prior to maturity on which a callable bond may be redeemed by the issuer. If the issuer determines there is a benefit to refinancing the issue, the bond may be redeemed on the call date, at par, or at a small premium to par depending on the terms of the call option.