Tuesday 09 December 2014 by Lincoln Tragardh Legacy

From the Trading Desk (09/12/14)

Economic wrap

Australia’s disappointing economic growth data surprised markets last week, as the gross domestic product missed expectations by 0.4% for the quarter.  The data, released by the Australian Bureau of Statistics, showed the economy expanded just 0.3% in the September quarter and only 2.7% over the year to September.  The September quarter result was the weakest since March quarter 2013.  The biggest detractors on growth were falls in business and government investment. Positive influences included solid household spending and export growth.

In reaction to the uninspiring figures, the Australian dollar slid, dipping below US84c to a four-year low. They have also fuelled speculation that the Reserve Bank is now more likely to cut official interest rates than raise them.  Many economists have now revised their outlooks tipping interest rates cuts in 2015 and reinforcing the themes of global and Australian interest rates remaining ‘lower for longer’.   

As markets digested the news, bonds rallied sending the 5 and 10 year benchmark swap rates lower by 2-7 basis points (bps) to 2.91% and 3.48% respectively.  Similarly the 5 year Commonwealth Government yield dropped 4 bps over the week, closing the week at 2.48%.

Meanwhile the US released positive data last week, with employment increasing by 321,000 in November, well above the forecast jobs gain of 230,000.  This is the strongest increase in jobs in almost three years. Additionally, hourly earnings rose by 0.4% in the month, above expectations of a 0.2% gain.  The solid data pushed up the US dollar, sending the Australian dollar below US83c.

This coming week Australian employment data is due to be released with the market forecasting further weak figures.  It’s expected the unemployment rate will rise by 0.1% to 6.30%. Westpac Consumer Confidence data is also due out.

New DirectBonds

CBS Corp

FIIG is pleased to launch two CBS Corp USD fixed rate bonds maturing in August 2024 and August 2044.  The bonds are investment grade and available to wholesale investors only in minimum parcel sizes of $10,000.  The August 2024 issue is offered at an indicative yield to maturity of 3.4%, and the August 2044 is offered at an indicative yield to maturity of 4.56%.   FIIG has prepared factsheets which can be accessed hereExternal link - opens in a new window (2024) and hereExternal link - opens in a new window (2044).

Pricing and trading situation

Qantas and Fortescue show why high yield diversification makes sense

Qantas and Fortescue have been two of the highest traded bonds at FIIG over the past month. Investors have liked the turnaround story with Qantas, with the airline expecting to be profitable in FY15 after cost cutting and the fall in the oil price. Meanwhile, Fortescue offers high yielding US dollar exposure in an ASX listed company with an $8.3bn market capitalisation. Investors have taken advantage of an increase in value on the Fortescue bonds resulting from the increased volatility in the mining sector, a falling iron ore price and the 2019 bond being priced to maturity.

It’s important to remember that high yield bonds will be more volatile than investment grade bonds. So, it’s important to diversify your high yield holdings. For example since 1 November, Qantas’ bond price has increased while Fortescue’s bond price has fallen, although the fall in Fortescue has been partly offset by a weaker Australian dollar over that period. Investors who have invested in both Qantas and Fortescue over this period would have experienced less overall volatility in their capital returns than holding the bonds individually.

PAYCE Consolidated Limited

FIIG originated PAYCE was the most traded bond last week after becoming available to retail investors, marking one year since issue. The 9.5% fixed rate bond is currently offered at an indicative yield to first call in December 2016 of 5.36%.

Company updates

G8 Education: increase to earnings guidance

Last week G8 gave a brief update to the market.  G8 anticipates that its audited EBIT for the financial year ending 31 December 2014 will exceed the average forecast from 11 brokers of $101m by “less than 5%”.  The group also noted that in November it settled 15 childcare centres bringing its total to 437 centres in Australia.

The G8 fixed rate August 2019 is offered at an indicative yield to maturity of about 6%, while the floating rate March 2018 is indicatively offered at 300bps over BBSW.