Tuesday 15 July 2014 by FIIG Research Legacy

From the Trading Desk (15/07/14)

Yield direction and volatility

Bonds rallied last week after concerns increased that equities have risen too far, too fast and following a rise in the Australian unemployment rate. Some Fed policy makers were concerned investors may be growing too complacent about the economic outlook, according to the minutes of their June meeting. It stated that supervisory measures should be used to “address excessive risk-taking and associated financial imbalances”. Stocks slid off the back of these comments as investors sought safety in treasuries.

Australia’s unemployment rate rose to 6%, with 15,900 jobs being added for the month. Job creation came in slightly stronger than the 12,000 new jobs that were expected; within that however, 19,700 part time jobs were created, offset by a fall of 3,800 full-time positions.

In a weekend interview published on the website of The Australian, RBA Governor Glenn Stevens warned that complacency about Australia’s economic growth is allowing political leaders defer tough budget decisions, increasing the risk that the next downturn will be a more serious one. He also forecast that the eventual rise in rates in the US would be disruptive to global financial markets, as is the case whenever the Fed changes course, and reiterated that investors are “underestimating the probability of a material decline” of the Australian dollar.

The 5 year and 10 year benchmark swap rates both closed 8 basis points (bps) lower over the week, closing at 3.19% and 3.83% respectively. The 5 year Commonwealth government yield closed 12 bps lower at 2.83% while the 10 year Commonwealth government yield closed 17 bps lower at 3.42% for the week.

Activity increases in non-A$ bonds

Over the past week, FIIG has seen a significant increase in demand for foreign denominated bonds, with nearly A$4m equivalent traded. While the impetus behind this may vary from client to client, it seems logical to assume this is at least in part a reaction to RBA Governor Stevens’ comments about a decline in the Australian dollar, and indirect support for that view by a number of economists who now predict further interest rate reductions in Australia. Thursday’s increase in the unemployment rate to 6% makes that scenario more likely.

The two most popular securities traded, both denominated in US dollars but with very different risk profiles, were:

  • Newcrest Finance 01Oct22 fixed coupon bond; indicatively offered at 4.75%
  • Transfield Services 15May20 fixed coupon bond; indicatively offered at 7.10%

Rabobank fixed coupon bond added to DirectBonds

Last week FIIG added the senior unsecured Rabobank Nederland April 2024 bond to the DirectBonds list. It is available to wholesale clients only and is accessible in $10,000 minimum parcel sizes. The bond pays a semi-annual coupon of 5.50% and has a legal maturity of April 2024. These notes have been classified as Australian withholding tax non-exempt; however, this status will be reviewed on 28 July 2014. Rabobank is the second largest banking organisation in the Netherlands with market leading mortgage lending and savings operations.

Other credit margins and trading activity

Supply of the Sydney Airport 2020 capital index bond (CIB) emerged again last week after offers had begun to dry up the week prior. The popularity of the Sydney Airport bonds pushed the 2020’s to become the most traded security of the week and also prompted some switches out of the 2030’s from clients eager to shorten duration, releasing a small supply of the 2030 issue. Supply in the 2020’s looks to be stable for the moment and demand is still building in the 2030’s.

There was little trading in indexed annuity bonds (IAB) due to scarcity of supply in many of our most traded issues. MPC Funding December 2033 remains our best value IAB available at a current indicative offer yield of 5.58%.

‘New style’ Lower Tier 2 (LT2) securities traded well early in the week but tapered off as offers from the institutional market began to fade. The LT2 space has experienced a considerable rally in recent weeks and now appears to have reached a point of equilibrium. FIIG can access the majority of our most traded LT2 issues in modest volume.

In the fixed rate corporate space, the FIIG-originated Adani Abbot Point May 2020 and Plenary June 2021 traded in significant volume as demand in both issues pushed yields lower. Praeco July 2020 also saw some activity as supply continues to trickle out of clients and move into the institutional market. FIIG can currently execute sell orders at an indicative bid yield of 6.70%.


Market levels are indicative as at 14 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.