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| Jun 20, 2016
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Overseas News:
- US Fed member Bullard (St Louis Fed president) has toned down his thoughts on further US rate rises saying he favours just one more rise in 2016. Stocks closed mixed on Friday with European shares +1% and US shares down 0.33%.
- US housing starts fell 0.3% in May, although permits to build increased which should lead to improved numbers ahead.
- Brexit takes centre stage this week with the vote having repercussions for risk and capital on a global basis. Results should be known during Friday’s Australian trading session.
- Brexit polls slightly favour the Remain vote, with the Remain camp appearing to have received some benefit from the murder of the UK MP Jo Cox. Cox was an ardent supporter of remaining in Europe.
- Greece received further aid with Eurozone officials agreeing Friday to fresh loans totalling 7.5bn Euro
Credit indices spreads are slightly higher over the last week with the US Investment Grade Index (IG) finishing yesterday at 82.8bps, 1 bp wider over the week. The US High Yield Index (HY) increased 8bps to finish yesterday at 452.5bps.
As a reminder, the IG index is comprised of the Credit Default Swaps of 125 equally weighted names whereas the HY is comprised of 100 non-investment grade names. Changes in them are reflected in prices of securities of varying credit quality.
US government bonds are unchanged on the week at 1.645% for the 10 year. 10 year Japanese government bonds trade at negative -0.14% and 10 year German Bunds trade at + 0.02%
On Tuesday and Wednesday, Fed Chair Yellen presents a six monthly testimony to Congress on monetary policy. Fed watchers will be hoping for a sign of when the Fed may next raise rates.
Domestic interest rates are a little higher over the last week, with the AUD 3 and 10 year swap rates currently at 1.82% and 2.32% respectively. The Australian iTraxx is at 129.5bps basis points (or 1.295% for this index of 25 Australian Investment Grade names), which is 1 bp higher on the week.
10 year AUD government bonds are at 2.10% and the RBA releases minutes from its June meeting tomorrow.
In terms of portfolio construction, we remain heavily in favour of Fixed rate bonds. Our Inflation Bonds preference has altered slightly to be weighted in favour of Indexed-Annuity Bonds (IABs) over Capital Indexed Bonds (CIBs) – both securities will always pay a margin over inflation, except in a deflationary YoY environment where IABs will outperform given the annuity payments cannot fall. We see deflation as unlikely but this is an easy way to manage risks to the downside.
We remain underweight in Floating Rate Notes, but include them for diversification where the credit margin earned over BBSW seems sufficient.
Yields have contracted below 4.00% on the Swiss Re Fixed securities but we still have some supply above 4.00% yield of the Swiss Re Floating securities for Wholesale investors able to invest $100 000 AUD.
As a reminder, these securities are callable in May 2017.
Examples of our ‘Best Bonds on Offer’ are shown below.
Fixed Rate
Security | Issuer | Security Type | Sector | Rating | Retail | Maturity Date | Mat / Call Date | Yield | Minimum Parcel |
SWISSRE-7.635%-25May17c | Elm Bv (Swiss Rein Co) | Fixed Coupon Bond | Insurance | A | No | 00-Jan-00 | 25-May-17 | 3.444% | 100,000 |
Glencore-4.50%-19Sep19 | Glencore Australia Holdings Pty Ltd | Fixed Coupon Bond | Resources | BBB- | No | 19-Sep-19 | 19-Sep-19 | 5.261% | 10,000 |
AdaniAbbot-6.10%-29May20 | Adani Abbot Point Terminal Pty Ltd | Fixed Coupon Bond | Infrastructure | BBB- | Yes | 29-May-20 | 29-May-20 | 8.623% | 10,000 |
CBL-8.25%-17Apr19 | CBL Corporation Limited | Fixed Coupon Bond | Insurance | NR | Yes | 17-Apr-19 | 17-Apr-19 | 6.130% | 10,000 |
PRAECO-7.132568%-28Jul20c | Praeco Pty Ltd | Fixed Coupon Bond | Infrastructure | Baa2 | Yes | 28-Jul-22 | 28-Jul-20 | 4.348% | 10,000 |
Floating Rate
Security | Issuer | Security Type | Sector | Rating | Retail | Maturity Date | Mat / Call Date | Yield | Minimum Parcel |
SWISSRE-BBSW+1.17%-25May17c | Elm Bv (Swiss Rein Co) | Floating Rate Note | Insurance | A | No | 00-Jan-00 | 25-May-17 | 4.32% | 100,000 |
AAI-BBSW+3.30%-18Nov20c | AAI Ltd | Floating Rate Note | Insurance | BBB+ | No | 18-Nov-40 | 18-Nov-20 | 4.646% | 10,000 |
DickerData - BBSW+4.40%-26Mar20 | Dicker Data Limited | Floating Rate Note | Other Corporate | NR | Yes | 26-Mar-20 | 26-Mar-20 | 6.118% | 5,000 |
MEBANK-BBSW+2.70%-29Aug19c | Members Equity Bank Pty Ltd | Floating Rate Note | Regional Bank | BBB- | No | 29-Aug-24 | 29-Aug-19 | 4.679% | 10,000 |
G8-BBSW+3.90%-3Mar18 | G8 Education Limited | Floating Rate Note | Other Corporate | NR | Yes | 03-Mar-18 | 03-Mar-18 | 6.059% | 10,000 |
Inflation Linked
Security | Issuer | Security Type | Sector | Rating | Retail | Maturity Date | Mat / Call Date | Yield | Minimum Parcel |
SYDAIR-ILB-3.12%-20Nov30 | Sydney Airport Finance | Inflation Linked Bond | Infrastructure | BBB | Yes | 20-Nov-30 | 20-Nov-30 | CPI + 3.36% | 10,000 |
RWH-IAB-0%-30Jun33 | RWH Finance Pty Ltd | Index Annuity Bond | Infrastructure | Baa2 | No | 30-Jun-33 | 30-Jun-33 | CPI +3.48% | 10,000 |
AGN-ILB-3.04%-20Aug25 | Australian Gas Networks | Inflation Linked Bond | Energy | AA | Yes | 20-Aug-25 | 20-Aug-25 | CPI +2.46% | 10,000 |
Praeco-IAB-0%-15Aug20 | Praeco Pty Ltd | Index Annuity Bond | Infrastructure | Baa2 | Yes | 15-Aug-20 | 15-Aug-20 | CPI + 2.40% | 10,000 |
MPC-IAB-31Dec25 | MPC Funding Ltd | Index Annuity Bond | Infrastructure | AA | No | 31-Dec-25 | 31-Dec-25 | CPI + 2.23% | 10,000 |
Floating rate note yields are subject to BBSW rate-set estimations and inflation product uses an implied CPI assumption of 2.5%.
Leigh Winton
Portfolio Strategy Services
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Portfolio Strategy Services
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Portfolio Strategy Services
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