The RBA Minutes released last week maintained its accommodative stance and data dependent outlook. With the Australian dollar faltering following concerns over China last week, the preference for high quality paper continues to be highlighted
Economic wrap
The
RBA released its August minutes last Tuesday - little changed from the July minutes. This month’s minutes maintained the RBA’s accommodative stance and data dependent outlook regarding any further easing. Interestingly, the minutes provided some commentary regarding a potential US rate rise, and stated that this was likely to result in further USD appreciation against the AUD. While it seems the RBA’s language has become less dovish, markets are still pricing in a 54% chance of a rate cut by year end.
The
FOMC also released its July minutes last week, in conjunction with US
CPI data which was weaker than expected. The
Committee sounded less confident about a September interest rate rise compared to the Atlanta President, Dennis Lockhart, who has been clear about his confidence in a September raise over the past two weeks.
The FOMC instead stated that
...they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.
Supporting this stance, both headline and core US CPI data came in weak at 0.1% for the month, short of expectations of a 0.2% rise. Nevertheless, all eyes are still towards the FOMC’s September meeting on the 16th and 17th.
The German parliament approved a third Greek Bailout package last Tuesday. Germany’s Finance Minister, Wolfgang Schaeuble surprisingly advocated the proposed EUR86bn deal. Schaeuble urged the German parliament that it would be irresponsible not to approve the deal. In the wake of the approval, Greek Prime Minister Alexis Tsipras announced his resignation, ushering in snap elections for Greece within the month. Tsipras still remains popular with Greek voters and is expected to win the forthcoming general election. The
IMF involvement in the third bailout package is unclear, with the organisation yet to make an announcement. However it previously stated its concerns regarding the sustainability of public debt.
The Aussie dollar faltered and bonds rallied following continued concerns over China last week. The dollar started the week valued at US73.84 cents and finished at US73.16 cents. Australian government 5 and 10 year bonds rallied 17 and 20 basis points (bps), with yields down to 1.96% and 2.59% respectively. Yet, credit spreads have been widening significantly, with credit exposure now about 9
bps cheaper on the week when compared to investment grade AUD entities (using the
iTraxx).
Flows
Sydney Airport bonds continued to lead inflation linked trading last week, with both the 2020s and 2030s topping the list of our most traded bonds. Sydney Airport remains the highest yielding investment grade credit available, highlighting investors’ preference for high quality paper. The Novacare 2033 inflation linked annuity also attracted some buying interest as we came into supply while investors sought inflation protection in a stronger credit.
Amid increasing market volatility, the flight to quality is spurring further buying in the investment grade corporate space. Notable names traded last week include the Asciano 2025 fixed rate bond and the Sun Group 2024 floating rate note. Both are investment grade names yielding around 4.43% and 4.49% respectively.
Another addition to our DirectBonds list in this space is the recently issued SAB Miller 2020 Australian dollar fixed rate bond – for more information on this high quality senior debt option please see the factsheet.
In the higher yield space, positive reporting results from CBL and Newcrest have led to an uptick in buying activity. On the other hand, recent selling in Cash Converters has seen levels drop to a point were opportunistic buyers are now seeing value, with two-way flow picking up.
Pricing accurate as at 24 August and subject to change. Please contact your FIIG representative for more information.