Tuesday 05 August 2014 by FIIG Research Legacy

From the Trading Desk (05/08/14)

Yield direction and volatility

Yields moved higher last week despite weaker than expected building approvals figures and heighted geopolitical tensions after the US and Europe announced tougher sanctions against Russia.

The 10 year Commonwealth Government yield rose 9 basis points (100 basis points = 1%) (bps) to close at 3.52%. Similarly, the 10 year benchmark swap rate increased 7bps to end the week at 3.90% on Friday. This was reflected in some of our favourite fixed rate notes, such as the Qantas May 2020 bond which increased 4bps to finish at 6.99% indicatively offered.

RBA Meeting

The Reserve Bank of Australia (RBA) met yesterday and, as widely expected, left interest rates unchanged for an 11th consecutive month. The accompanying statement by Governor Glenn Stevens did nothing to indicate a bias in either direction, and the market reaction was suitably benign.

Of note is the comment that “Inflation is expected to be consistent with the 2–3 per cent target over the next two years”. This is interesting given CPI has been trending higher and is now right at the top end of that band (3.0%), suggesting the RBA view is for that trend to immediately reverse direction. 

New direct bond – Next DC

New to our DirectBonds list last week was the recent NEXT DC Ltd 2019 senior unsecured bond. The bond is paying a fixed, semi-annual coupon of 8.00%, and is available to wholesale investors only in minimum parcels sizes of $10,000 and has a maturity of June 2019. Next DC develops and operates carrier and ‘vendor neutral’ data centres in Australia and New Zealand.

The bond surfaced in modest size late last week, prompting a flurry of bid interest in the new name and generating $3.5m in turnover. Given the relatively small issue size of $60m, ongoing supply is expected to be irregular.

Other credit margins and trading activity

Activity among inflation linked assets remained strong last week as the Sydney Airport capital index bonds (CIB) continued their dominance of secondary market trading. Steady flow in both the 2020 and 2030 issues saw turnover reach $12.5m across the two names. FIIG remains able to access both Sydney Airport bonds at the indicative current offer yields listed below:

  • Sydney Airport Nov 2020: 5.63%
  • Sydney Airport Nov 2030: 6.31%

The Envestra August 2025 CIB traded in size for the first time in weeks after a moderate sized parcel surfaced from the institutional market. Given the scarcity of the issue, supply was quickly sold. The Envestra bond is typically tightly held, meaning future supply can be very difficult to forecast.

Trading among inflation annuity bonds (IAB) was minimal as the market continues to suffer from a lack of supply.

CBL Corporation Limited’s (CBL) Apr 2019 fixed rate bond, one of FIIGs more recent new issues enjoyed a very active market last week as many holders chose to realise capital gains due to a strong rally in the bond price. CBL is the highest yielding FIIG originated issue that is immediately available. Purchase orders can currently be filled at an indicative offer yield of 6.59%.


Market levels are indicative as at 5 August 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.