Tuesday 12 August 2014 by FIIG Research Legacy

From the Trading Desk (12/08/14)

Yield direction and volatility

After a quiet start, yields experienced a volatile two days toward the end of last week. A disappointing employment report in Australia prompted expectations for further interest rate cuts, which was followed by a promising jobless claims report from the US, which caused yields to reverse direction sharply.  

Australia’s unemployment rate unexpectedly jumped to its highest level in more than 10 years, after an unexpected fall in jobs growth. The jobless rate increased to 6.4% from 6.0% the previous month. This is its highest level since August 2002. The significant jump has been attributed to a weak labour market but also a change in methodology of measuring those seeking work by the Australian Bureau of Statistics.  This unemployment spike has brought forward expectations that there will be further interest rate cuts by the Reserve Bank of Australia (RBA). In the dichotomy between rising unemployment and rising inflation, the RBA appears to be leaning toward unemployment representing the higher risk and there are no signs of imminent interest rate rises.

The 5 year and 10 year benchmark swap rates closed 2-4 basis points (bps) lower over the week, finishing at 3.27% and 3.83% respectively. The 5 year and 10 year Commonwealth government yields were down 22-23 bps for the week, closing at 2.75% and 3.28%.

Domestic data due out this week includes NAB Business Confidence, House Price Index, and Westpac Consumer Confidence.

New direct bond for retail clients – G8 Education

This week the FIIG originated G8 Education Limited (G8) fixed rate bond became available to retail investors. The bond pays a fixed rate coupon of 7.65% semi-annually and has a legal maturity of 7 August 2019. It is available in $10,000 minimum parcel sizes. G8 is Australia’s largest publicly listed operator of childcare centres with 349 childcare and education centres in Australia as at July 2014.

The bond easily streaked its way to the top of FIIG’s most traded securities list last week on the demand from a wider client base. The change saw many wholesale holders choose to realise capital gains by taking advantage of the buoyed bid side of the market caused by fresh retail demand. G8 marks the third FIIG originated issue to become available to the retail market, joining the Silver Chef and Mackay Sugar fixed coupon bonds. FIIG is currently well placed to execute client purchase orders at an indicative offer yield of 6.00%.

Other credit margins and trading activity

There was significant action in the inflation linked space last week as a much needed injection of Index Annuity Bond (IAB) supply relieved a drought that has persisted for a number of weeks. Civic Nexus September 2032s, which funded the Southern Cross Station project in Melbourne, became available via an institutional seller, providing stock for retail clients which have recently had little choice in the IAB space. Additionally, the MPC Funding December 2033s, issued by the funding arm for the project to develop the Melbourne Convention Centre, traded actively as an increased offer yield made them the highest yielding IAB that FIIG offers. Both the Civic Nexus and MPC issues are still available with indicative offer levels below:

  • Civic Nexus Sept 2032: 5.40%
  • MPC Funding Dec 2033: 5.52%

The Sydney Airport 2020 and 2030 Capital Index Bonds (CIB) continued to offer value as active two-way trading among both issues pushed turnover for the two names to $8m for the week. Supply is not an issue with both securities currently offered in ample volume. Indicative offers are below:

  • Sydney Airport Nov 2020: 5.68%
  • Sydney Airport Nov 2030: 6.31%


Market levels are indicative as at 11 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.