The iTraxx is a measure of volatility, when the index increases so too does the markets’ perception of risk. It was a volatile week with risk assets recording large losses across the board
Economic Wrap
It was a volatile week with risk assets recording large losses across the board. Losses continued out of China following the indefinite extension of restrictions that banned major shareholders from selling their interests in listed companies. Friday also saw sanctions lifted for Iranian oil output, which sent the commodity plunging. Brent Crude Oil lost 6.6% on the day to finish the week 14% lower at a 12 year low of USD28.94 per barrel. The Dow Jones followed suit and declines were exacerbated by contractions in US retail sales and producer price indices. The index lost 2.27% over the week.
US Treasury bonds fared well in the risk-off environment with yields tightening across the curve. Both 3 and 10 year US government debt was 9 basis points (bps) lower in yield to 1.08% and 2.03% respectively. Over the past month, the market has pushed out its projection for the next US Fed rate hike from June to September. During the same time, the divergence of views among both voting and non-voting members of the FOMC has returned, with some expressing their bias toward raising rates four times this year, while others prefer to await continued economic improvement.
Domestically our resource heavy economy followed global trends; the ASX lost 2% and government bonds rallied, but better than expected unemployment data did provide a cushion. The headline unemployment rate remained at 5.8% better than the 5.9% expected, with net jobs relatively stable having decreased by just 1,000.
Australian government bonds were down 3bps with 3 and 10 year yields at 1.92% and 2.69% respectively. Despite the rally in high quality bonds, credit lost ground given the deteriorating commodity landscape. The Australian iTraxx index widened from 133bps to 146bps. Credit spreads have continued to widen with the index opening over 150bps this morning. The last time it was this high was November 2012.
Flows
The USD space last week was dominated by buying in BlueScope, given current supply at attractive levels. Supply remains good with an indicative offer yield of 7.82%. The high yield and short 2018 maturity date has attracted investors looking to combine the investment with their own medium term currency views. Additionally, the Virgin 2019 USD bond has attracted interest from those looking for a credit which stands to benefit from the glut in oil.
In AUD trading, we had buying in the Royal Women’s Hospital nominal bond, as clients looked to increase exposure to infrastructure assets. We have further supply available at an indicative yield to call of 6.23%* in March 2017.
Given the performance of government and high quality bonds in contrast to the widening in credit spreads, particularly among resource names, we have seen renewed interest in Lower Tier 2 debt issued by financials. Investors have been interested in the value proposition given the high quality names and attractive yields.