Tuesday 02 September 2014 by FIIG Research Legacy

From the Trading Desk (02/09/14)

Yield direction and volatility

Last week saw renewed geopolitical tensions between Russia and Ukraine and speculation that the European Central Bank (ECB) is prepared to expand its stimulus, sending yields lower. Weaker data in Europe is fuelling bets the ECB will consider quantitative easing, which could involve asset purchases and further cuts to the benchmark interest rates. The market is looking to the ECB meeting later in the week for further clarity.    

Off the back of this speculation, the 5 year and 10 year benchmark swap rates closed 8-10 basis points (bps) lower over the week, finishing at 3.18% and 3.68% respectively. The 5 year and 10 year Commonwealth government yields were both down 9-15 bps for the week, closing at 2.83% and 3.29%.

Qantas Airways Limited was one of the many companies to release its results to the market last week, posting a $2.8bn net loss. Although this was worse than expected, its underlying pre-tax loss of $646m was better than consensus estimates. In response to this, the share price closed 6.95% higher, and the Qantas bonds traded 7-14 bps tighter across the three bond maturities.

In a statement that broadly echoed previous meeting outcomes, the Reserve Bank of Australia left interest rates unchanged at 2.5%, citing spare capacity in the labour market, a historically high Australian dollar, and contained inflation.

Other credit margins and trading activity

Trading in inflation linked bonds was stoked by the appearance of a large sized parcel of the elusive Envestra Aug 2025 capital index bond (CIB). Demand for the Envestra had been building for some time given the tightly held nature of the issue. This ensured that the stock was quickly spoken for, leaving little remaining for last minute bidders. As supply of this particular security has historically been few and far between, future supply is very difficult to forecast.

The ever present Sydney Airport CIB issues have become increasingly difficult to source in recent weeks, leaving little alternative for investors hunting inflation protection. Limited supply of the Sydney Airport 2030 ensured modest turnover of $2.5m for the week.

FIIG originated issues experienced an active week as sellers of some of our most sought after names came to market. The G8 Education Aug 19 fixed coupon bond topped our most traded issues list as fresh demand from the retail space absorbed the limited supply. Both the G8 fixed and floating rate lines are in high demand, placing FIIG in a good position to execute client sell orders.


Market levels are indicative as at 01 September 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.