Yield direction and volatility
Safe haven investing last week sent bonds rallying further after geopolitical unrest escalated in Gaza and a Malaysian passenger plane was shot down over the Ukraine, unsettling markets.
The market was reactive to geopolitical risk with the 5 year and 10 year benchmark swap rates falling 4-6 basis points (bps) over the week, closing at 3.19% and 3.80% respectively. The 5 year and 10 year Commonwealth government yields both closed 6 bps down for the week at 2.80% and 3.38%.
The Australian Consumer Price Index (CPI) data is due to be released today, with the market expecting a 0.5% rise for the quarter, bringing the CPI to 3.0% year on year.
Switch activity seen into Adani Abbot Point
The Adani Abbot Point Terminal (Adani) May 2020 fixed coupon bond continues to trade well as our highest yielding investment grade bond. Adani has closely tracked movements in outright interest rates, pushing the price to a modest premium. Adani is currently available in volume at a trading margin of +248bps.
We are seeing increasing activity from investors switching lower yielding fixed coupon bonds for this issue. Some examples of switches have been:
- DBCT 2016, improving yield to maturity by 105bps
- DBNGP 2019, improving yield to maturity by 80bps
- Global Switch 2020, improving yield by 70bps
- Downer 2018, improving yield to maturity by 95bps
- AXA 2016, improving yield to maturity by 60bps
Other credit margins and trading activity
Qantas traded well during the week with $4m of turnover recorded across the June 2021 and May 2022 issues. There was some price softness late in the week after the news surrounding Malaysia Airlines flight 17 caused the credit spread to widen around 5bps, however this was largely offset by a rally in outright yields. Qantas’ share price closed up 0.80% on Friday.
An injection of supply caused a flurry of activity among inflation linked assets last week after a large sized parcel of the Plenary Health Finance (PHF) September 2029 indexed annuity bond (IAB) came to market. The IAB space has suffered from a lack of supply in recent weeks with the MPC Dec 2033 being the only issue consistently available. The strong demand for these assets made short work of the PHF, leaving FIIG with a significant overhang of bid interest. Given the relatively small issue size of PHF at $87m, ongoing supply is very difficult to forecast and is unlikely to be consistent. As an alternative for clients looking for exposure to the IAB space, the MPC Dec 2033 is currently available at an indicative offer yield of 5.50%.
Sydney Airport capital index bonds (CIB) traded well as the ongoing supply of the 2020 issue made it an attractive switch target for clients looking to reduce their duration from the 2030 bond. Both securities experienced decent two-way trading, leaving FIIG with a modest supply of the 2030’s on top of our continued access to the 2020’s. Indicative offer yields shown below:
- Sydney Airport Nov 2020: 5.60%
- Sydney Airport Nov 2030: 6.33%
Notes:
Market levels are indicative as at 22 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.