Yield direction and volatility
Stronger data and better than forecast corporate earnings lifted sentiment and reduced the demand for safe-haven investments last week. US new home sales rose by 0.20% to hit a six-year high of 467,000 annualised. US applications for unemployment benefits were also down for the past month, the lowest at any time in 14 years. Stock markets rallied after corporate earnings from Caterpillar and 3M Co. beat analysts’ expectations.
The improved market confidence sent yields higher over the week with the 5 and 10 year benchmark swap rates closing 3-4 basis points (bps) higher to close at 3.18% and 3.67% respectively.
Last week the Australian Consumer Price Index (CPI) was released, with the headline rate rising 0.5% for the September quarter. This was above economists’ forecasts of 0.4%. The year-on-year headline rate was in line with expectations of 2.30%.
The markets are eagerly awaiting the Federal Open Markets Committee (FOMC) monthly meeting this week for commentary on foreword rate guidance and the completion of its bond purchasing program.
DirectBonds
Last week the FIIG originated bond, PMP Limited Oct 2017, became available to retail investors.
PMP Limited is an ASX listed printing and distribution company, with market leading or second positions in each of its core businesses. The bond is available with indicative offer yield of 6.50% to maturity, and 5.40% to first call in October 2015.
The bond had previously only been available to wholesale investors. It pays a semi-annual coupon, is available in minimum parcel sizes of $10,000 and has a legal maturity of October 2017. A full research report is available here.
Inflation Linked
Index annuity bonds (IAB) took centre stage last week after fresh supply of some very difficult to source securities came to market via the institutional sector. The Novacare April 2033 and JEM CCV June 2022 IABs traded in volumes of $2.5m and $9.5m respectively, and were swiftly spoken for as demand easily outstripped supply. FIIG remains very well bid in both issues with future supply very difficult to forecast due to the scarcity of these securities. FIIG does have access to a number of alternative IABs (indicative offers shown):
- Civic Nexus September 2032: 5.43%*
- MPC Funding December 2025: 4.61%*
- MPC Funding December 2033: 5.45%*
Capital index bonds (CIB) also traded well last week as supply in the typically elusive Envestra August 2025’s spilled over from the prior week’s trading. A favourite among clients, Envestra, remains well bid placing FIIG in an excellent position to execute client sell orders to facilitate both sides of the market. Old favourites, the Sydney Airport 2020 and 2030 issues, also traded actively. Both Sydney Airport securities are currently available (indicative offers shown):
- Sydney Airport 2020: 5.67%*
- Sydney Airport 2030: 6.34%*
Other Traded Names
As mentioned above, PMP Limited’s October 2017 fixed coupon bond (FCB) became eligible for investment by retail clients, prompting a flurry of activity in the name. PMP easily topped the list of our most traded issues last week with 66 transactions, and remains in high demand. PMP marks the fourth FIIG originated issue now open to retail investors, joining the ranks of the following (indicative offers shown):
- G8 Education August 2019 FCB: 6.27%
- Mackay Sugar Ltd April 2018 FCB: 5.86%
- Silver Chef Ltd September 2018 FCB: 6.51%
Another FIIG originated deal, 360 Capital’s Sept 2019s also saw good volumes and is trading with an indicative bid/offer market of 7.00%/6.70%.
Qantas bonds were also active, driven by the release of indicative figures which indicate the airline made an underlying profit before tax for 1Q15, and is on track to deliver a profit in FY15. As we have said for months, Qantas is a good value trade. Indicatively, the Qantas 2022 bonds are yielding 7%, while the 2021s and 2020s are yielding 6.93% and 6.52% respectively. Supply is good in each of these lines.
Finally, Cash Converters’ released its first quarter 2015 trading update. The results were exceptionally good with normalised EBITDA profit for the quarter up 61% to $16.6m. The major drivers for revenue growth included an increase in personal loan income of $12.5m and an increase in corporate store revenue of $6.1m. Cash Converters’ September 2018 fixed coupon bond is available with an indicative yield of 6.40%.
*Assumes CPI of 2.5%, the mid-point of the RBA inflation target range.