RBA minutes released Tuesday, UK data due is expected to show post Brexit weakness
Economic Wrap
US data on Friday was weaker than expected with Producer Price Index (PPI), retail sales and consumer sentiment all missing forecasts.
In addition to the release of the RBA minutes on Tuesday 16 August, the US FOMC minutes will be made available this week. Following last week’s comments by the San Francisco Fed president, John Williams, that a pre 2017 rate hike is warranted, the minutes will be scrutinised for further clues on the timing of another US move in interest rates.
The AUD is trading at 0.7640 today, which is largely unchanged from Friday, with recent gains helped by rising commodity prices.
US government bonds are lower in yield over the week, with the 10 year bond currently at 1.505%. The other major economy government yields are lower too, with the biggest move occurring in the UK, post the aggressive BOE bond purchases last week. Current 10 year Japanese government bonds are trading at a negative 0.08% yield, 10 year German bunds trading at negative 0.11% and 10 year UK government bonds (gilts) trading at 0.52%.
Other news:
- Stocks closed mainly lower on Friday. In Europe the Eurostoxx was down 0.13% although the FTSE 100 was up marginally, increasing 0.02%. In the US, the Dow Jones and S&P500 were down 0.20% and 0.08% respectively
- UK gilt yields fell to new lows and the Pound fell and closed for the week below 1.3000 against the USD. The UK releases data this week on inflation, unemployment and retail sales; which are for the post Brexit July period. All the data are expected to show weakness
- The BOJ has been increasing buying of Japanese equities and is on track to become the largest owner in 55 companies (of the Nikkei 225) according to Bloomberg. The Japanese stock market is the third largest in the world
- Oil prices rose last week after comments by the Saudi energy minister (Khalid al-Falih) that OPEC will take action if prices stay low
Credit indices spreads are largely unchanged over the last week with the US Investment Grade Index (IG) finishing Friday up 1.25bps at 71.5bps, whilst the US High Yield Index (HY) narrowed 3.5bps to finish Friday at 388.75bps.
Domestically, the 10 year Australian government bonds last traded at 1.885%, which is 4bps lower on the week. The Australian iTraxx is at 103.00bps (or 1.03% for this index of 25 Australian Investment Grade names), which is 2bps lower on the week.
Flows
On the back of the Adani Abbot Point Terminal (AAPT) 2018 tender announcement last week there has been renewed buying interest in the 2020 maturity as the news is viewed as debt positive. The longer dated tenor is available in $10,000 minimum parcels, which is more suitable for some investors as the shorter dated bond can only trade in a minimum size of $200,000.
There has been good institutional buying support in the Sydney Airport 2020 bond as they have ongoing appetite for shorter dated lines as they move closer to maturity. Investors have been exiting the 2020 bond and moving up the tenor curve to the Sydney Airport 2030 line and taking advantage of the yield pick-up. Other switches included the Adani 2020 bond and the new USD TransAlta.
In non AUD last week TransAlta Corporation’s fixed USD 2022 and 2040 maturity bonds were both added to the DirectBond suite. The shorter dated bond pays an indicative yield to maturity of 4.60%, while the 2040 bond is yielding 7.40% to maturity . TransAlta is one of Canada’s largest publicly traded wholesale power generators and marketers.
With the AUD popping above 0.7700 US cents last week, there was a spur of buying in USD bonds, one in particular was IAMGOLD, which was only recently added to the DirectBonds list. The equity raise to buy back bonds it announced last week was favourable as proceeds are being used to pay down debt. The bond price has moved higher on the news.
Note: IAMGOLD USD bonds are available in minimum $10,000 parcels. Yield to maturity is 6.77% as at 15 August but subject to change. Both IAMGOLD and TransAlta are available to wholesale clients only.