Tuesday 14 October 2014 by FIIG Research Legacy

Trading Desk

Yield direction and volatility

Equity markets were rattled last week after the International Monetary Fund (IMF) cut its global outlook and Germany reported weak economic data, causing bonds to rally as investors sought safety.

The IMF trimmed its global growth forecasts by 0.1 percentage points (pp) for 2014 and 0.2pp for 2015. German industrial production fell by 4% in August, the biggest fall in five years.

Share markets globally were choppy over the week in response to the disappointing news, with the Australian share market hitting a new eight-month low.

The negative sentiment sent bond yields lower, with the 5 and 10 year benchmark swap rates both closing 9 basis point (bps) lower over the week to 3.21% and 3.68% respectively. The 5 year and 10 year Commonwealth government yields both decreased by 10bps for the week, finishing at 2.87% and 3.33%. 

Australian housing finance figures were released last week for August, shrinking 0.9% for the month instead of growing by the 0.2% the market expected.

New DirectBond – Kinross Gold

FIIG added a new USD bond to the DirectBonds list last week, Kinross Gold Corporation’s senior unsecured fixed rate bond. This bond is available to wholesale clients only, and unlike other USD bonds, is available in minimum parcel sizes as small as USD $10,000. The bond pays a semi-annual coupon of 5.95% and has a maturity of March 2024. Kinross Gold Corporation (Kinross) is one of the largest gold producers in the world based on 2013 production volumes. Based in Toronto, Kinross was formed in 1993 from three predecessor mining companies, and now owns or has joint venture interests in nine operating mines.

The Kinross Gold bond is indicatively offered at a yield to maturity of 5.47%.

Other credit margins and trading activity

Activity among inflation linked assets was spurred by fresh supply in some of our most favoured securities last week. Consistently among our most traded securities, the Sydney Airport 2030 was the standout as our highest yielding capital index bond (CIB) in a week hallmarked by falling outright interest rates. The yield on the Sydney Airport proved a compelling switch target for clients looking to reduce exposure to another of FIIG’s favourite CIB’s, the Envestra August 2025. Traditionally scarce, Envestra is consistently a better bid security which saw many clients choose to capitalise on the built-up demand. This has left FIIG with access to supply of the Envestra for the first time in months.

Currently available CIBs are listed below at indicative offer yields:

  • Envestra Aug 2025: 5.15%
  • Sydney Airport Nov 2020: 5.57%
  • Sydney Airport Nov 2030: 6.34%

Last week saw FIIG gain access to a large parcel of the Joondalup January 2018 fixed coupon amortising security. This was the first bond of its kind to be traded by FIIG, and proved popular among clients as turnover reached $31m (original face value). The Joondalup bond is expected to be a very tightly held security, coupled with a relatively small issue size we are not expecting there to be much trade activity going forward.

High yield bonds continue to trade well with the retail eligible FIIG originated securities Cash Converters September 2018 and G8 Education August 2019 fixed coupon bonds proving the most popular. FIIG still has excellent access to a number of our favourite high yield securities and is well positioned to execute client purchase orders. A selection of available fixed rate securities is listed below at indicative offer yields:

  • CBL Corp. Apr 2019: 6.71%
  • G8 Education August 2019: 6.25
  • Mackay Sugar Ltd Apr 2018: 5.86%
  • Payce Dec 2018: 7.30%
  • PMP Finance Oct 2017: 6.57%


Market levels are indicative as at 13 October 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.