Tuesday 07 October 2014 by Lincoln Tragardh Legacy

Trading Desk

Yield direction and volatility

Yields started last week lower after protests in Hong Kong and a US Ebola case rattled the market, but reversed and closed higher with the release of strong US employment figures.  US Payrolls increased by 248,000 last month, advancing higher than the 215,000 forecast. The jobless rate was revised down to 5.90%, falling from 6.10%.  This is the lowest the US unemployment rate has been in six years.  

The solid payrolls data boosted confidence in the US economy and that positive sentiment flowed through to the domestic market with the 5 year benchmark AUD swap rate closing 1 basis point (bps) higher over the week at 3.32% and the 10 year benchmark swap rate flat at 3.80%. The 5 year Commonwealth government yield was up 7 bps for the week, finishing at 2.99%.

The Australian retail sales figures were released last week for August, advancing 0.1% to $23.3bn, but below the 0.4% rise forecast.  There was a slump in department store sales, with falls in hardware, electrical and furnishing sales.

RBA leaves cash rate unchanged at 2.50%

As expected, the RBA yesterday left the cash rate unchanged at 2.50% for the 14th month in a row.   All 26 economists surveyed by Bloomberg had predicted ‘no change’ for the October meeting.

With the news broadly expected, swap markets and the AUD were relatively unchanged immediately following the announcement.

The accompanying statement focused on the level of the Australian dollar and property prices, as has been the case for the recent past.

Following the announcement, Bloomberg commented:

“The Reserve Bank of Australia kept its key interest rate at a record low to spur hiring in an economy struggling to expand outside the property market...The central bank is trying to foster domestic growth, including residential construction, to soak up former mine workers and avoid a growth gap emerging as a resource investment boom fades.

While a 7 percent drop in the currency last quarter may encourage companies to open their pocket books and invest, policy makers are struggling to cool property investment that is starting to distort the housing market. The central bank began indicating from mid-September that it planned measures to target speculation in the housing market by people buying residential property as investments.

 The countervailing force in the economy is the local dollar, which has weakened more than 5 percent since the last policy meeting. The central bank said during its easing cycle that part of the reason for 2.25 percentage points of cuts was to offset some of the effect of the high Aussie dollar.”

We continue to expect cash rates to remain ‘lower for longer’.

Inflation linked

The inflation linked sector was the standout last week as supply of large size parcels of some of our more favoured securities came to market. More than $3.5m of the MPC December 2033 indexed annuity bond (IAB) traded after supply lines opened up from the institutional sector, placing buyers in an excellent position. In addition to the MPCs, FIIG currently has access to a number of our favourite IABs. Indicative offers yields are as follows:

  • Australian National University October 2029: 4.85%*
  • JEM Southbank TAFE June 2035: 5.65%*
  • MPC Funding December: 5.50%*
  • Plenary Justice June: 5.40%*

The Sydney Airport November 2020 and 2030 capital indexed bonds (CIB) once again placed among our most traded securities, as good two-way flow freed up supply. This marked the first time in months that both the 2020 and 2030 had been available in size simultaneously. FIIG is currently in an excellent position to fill purchase orders in both issues. Indicative offer yields are as follows:

  • Sydney Airport November 2020: 5.67%*
  • Sydney Airport November 2030: 6.45%*

Other traded names

The high yield market proved the next most active space after the inflation linked sector last week, spurred on by a wide array of supply. The NextDC June 2019 fixed coupon bond (FCB) was the most actively traded non-inflation linked security last week as a modest parcel of supply became available via an institutional seller. Being the highest yielding Australian Dollar denominated FCB (current indicative offer is 7.86%), NextDC typically trades away soon after becoming available and is therefore a very tightly held security. Because of this, access to the NextDC has been sporadic and further supply is difficult to forecast.

Elsewhere in the high yield space, many of the FIIG originated issues remain in good supply. A selection of the bonds on offer are shown below:

  • 360 Capital September 2019: 6.72%
  • CBL Limited April 2019: 6.66%
  • Coffey International September 2019: 7.09%
  • G8 Education August 2019: 6.19%
  • Mackay Sugar Limited April 2018: 5.87%

High yielding Asset Backed Securities (ABS) remain popular

There was activity in high yield Asset Backed Securities (ABS) last week.  Liberty 2013-1 SME Class F Notes became available with an expected return of around 9%.  These were quickly snapped up.  This pool is backed by loans to Small and Medium Enterprises secured by commercial and residential property.

Pepper Homeloans also issued their latest residential mortgage backed security (RMBS) transaction, the Pepper Residential Securities Trust No. 13.    The F notes were available for purchase @ $102 providing the buyer with a trading margin of BBSW +6.37% equalling a forecast yield of 9.76%.

Asset Backed Securities are available to wholesale investors only.  Contact your dealer to learn more about the opportunities available in this sector.

*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.

All prices are accurate as at 7 October 2014.