Yield direction and volatility
Geopolitical tensions and uncertainty in equity markets triggered safe-haven demand last week, sending bond yields lower. The US and its allies carried out air strikes against Islamic State positions in Syria, while a law has been proposed in Russia to allow the seizure of foreign state assets in the country in retaliation for further economic sanctions against Russia.
Equity markets were skittish after Apple shares lost 3% after it withdrew a faulty update to its new operation systems.
In reaction to the news, the 5 year and 10 year benchmark swap rates were down 8 and 12 basis points (bps) respectively over the week. 5 year swap closed the week at 3.34%. 10 year closed at 3.83%.
This week in Australia the Retail Sales figures are due to be released, with the market expecting no change from the prior month of +4.00%.
Inflation Linked
The Sydney Airport capital indexed bonds (CIB) again placed high among our most traded securities last week as a rise in interest rates prompted selling of longer dated assets. The move saw a decent sized parcel of the 2020 issue come to market, which was quickly spoken for by pent up demand. The longer dated Sydney Airport 2030 bond also experienced selling in reaction to rates, leaving FIIG very well positioned to execute client purchase orders. The 2030’s are currently available at an indicative yield to maturity of 6.43%* - the cheapest this issue has been since mid-August.
The Envestra 2025 CIB traded actively after supply became available via an institutional seller. Like the Sydney Airport 2020s, the Envestra quickly traded away to demand that had built up for this tightly held issue. Given the scarcity of the Envestra, future supply is very difficult to forecast.
Activity in indexed annuity bonds (IAB) remains relatively subdued as investors have favoured high yield and CIB securities in recent weeks. That being said, FIIG has access to a number of our favourite IAB securities. Yields shown are indicative only:
- JEM NSW Schools November 2035: 5.60%*
- JEM Southbank June 2035: 5.65%*
- MPC Funding December 2033: 5.50%*
Coffey International and 360 Capital new issues update
FIIG-originated issues remained a focus for investors last week as our most recent issue, the 360 Capital September 2019 fixed coupon bond (FCB) started trading in the secondary market. This came a week after the next most recent FIIG issue; Coffey International September 2019 floating rate note (FRN) began secondary trading. Since then Coffey International has traded to an impressive premium and is now indicatively offered at $103.50, however, it’s still early days for 360 Capital and a significant price movement is yet to be observed. Both Coffey and 360 Capital are currently in good supply, with FIIG able to execute client purchase orders at indicative yields of 7.12% and 6.72% respectively.
Other Traded Names
The Cash Converters (CCV) September 2018 FCB traded well as it continues to ride the wave of fresh demand in the wake of becoming eligible for investment by retail clients. Topping our list of most traded securities for the week with $3.5m of turnover, CCV remains among a plethora of high yield securities currently offered in decent size. Some standouts are listed below at current indicative yields:
- Adani Abbot Point May 2020: 5.90%
- CCV September 2018: 6.30%
- CBL Insurance April 2019: 6.60%
- G8 Education August 2019 FCB: 6.11%
- NextDC June 2019: 7.86%
- Qantas May 2022: 6.97%
Sustained interest in USD bonds
US dollar denominated bonds again proved popular last week as the Australian dollar continued its decline. Fortunately, supply remains much the same as last week, with FIIG able to source a wide variety of USD denominated names:
- Emeco March 2019: 8.90%
- Fortescue April 2022: 5.79%
- Newcrest October 2022: 5.07%
- Petrobras May 2023: 4.52%
*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.
All prices are accurate as at 29 September 2014.