Yield direction and volatility
The European Central Bank (ECB) unexpectedly cut interest rates last week and announced a bond-buying program, sending global bond yields lower. The ECB cut its main refinancing rate to 0.05% from 0.15% and announced plans for an asset-backed securities and covered bond purchase program.
Meanwhile, US employment data was weaker than expected. The US nonfarm payrolls increased 142,000 last month, the lowest number in eight months, but the jobless rate fell to 6.10%.
The 5 year and 10 year benchmark swap rates closed 12-14 basis points (bps) higher over the week, finishing at 3.31% and 3.84% respectively. The 5 year and 10 year Commonwealth government yields were up 9-15 bps for the week, closing at 2.93% and 3.47%.
New Issuer – Coffey International
Last week, FIIG brought to market a five year floating rate note from Coffey International Limited (Coffey). This represents FIIG’s twelfth new bond to market, and its second Floating Rate Note offering. The bond carries a floating rate of BBSW+4.65%, paid quarterly, and is available to wholesale investors only. It has a legal maturity of September 2019 and is expected to begin trading on the secondary market next Friday. Coffey is an ASX listed professional services group that provides specialised consulting services in geoservices, international development and project management.
Other credit margins and trading activity
The G8 Education August 2019 fixed coupon bond was once again our most traded security for the week as supply flowed from clients looking to switch into the new Coffey deal. Trading at a premium since issuing in 2013, long time holders of the G8 have benefited from substantial capital gains, prompting many holders to realise profits. Bid interest from retail investors attracted to the relatively high yield to maturity has resulted in supply being quickly depleted.
A handful of other high yield securities became available last week, as often happens in the days surrounding a new issue. Mackay Sugar April 2018 and Silver Chef September 2018 both enjoyed active trading as the only other two retail eligible bonds originated by FIIG (along with the above mentioned G8 Education). High demand in these names results from the minimal variety of retail bonds with attractive yields. Supply in these names is expected to diminish over the coming weeks.
Trading among inflation linked assets was subdued last week as investors’ attention was turned towards opportunities in the high yielding fixed coupon space. However, the Sydney Airport capital index bonds (CIB) proved the standout among inflation protection as a decent sized parcel of the November 2020 issue became available. Often cited among our clients’ favourite issues, significant supply of the Sydney Airports has eluded our trading desks for a number of weeks. The ever present demand for the bonds meant that supply was quickly absorbed, leaving FIIG a better buyer of both the 2020 and 2030 issues.
Some of our more frequently traded indexed annuity bonds (IAB) became available in modest sizes last week as some clients chose to lighten exposure in favour of the new issue. The securities below are shown at indicative offer yields:
- Civic Nexus: CPI+2.90%
- JEM NSW Schools 2035: CPI+2.95%
- MPC Funding 2033: CPI+2.95%
- Praeco 2020: CPI+2.10%
Market levels are indicative as at 08 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.
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.
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.