UK data surprised on the upside and US Fed officials jawbone on rate rises
Economic Wrap
Fed vice chairman Fischer stated this week that the US economy is close to meeting the Fed goals whilst the San Francisco Fed’s Williams stated markets are underpricing the chances of a rate hike, both suggesting the Fed may increase rates this year
The AUD is trading at 0.7590 today, which is largely unchanged from Friday, with recent USD gains (AUD weakness) helped by the comments from Fed officials.
US government bonds are higher in yield over the week, with the 10 year bond currently at 1.59%. Other major economy government yields are higher as well. Current 10 year Japanese government bonds are trading at a negative 0.075% yield, 10 year German bunds trading at negative 0.031% and 10 year UK government bonds (gilts) trading at 0.62%.
Other news:
- Stocks closed lower on Friday. In Europe the Eurostoxx was down 0.90% and the FTSE 100 was down 0.15%. In the US, the Dow Jones and S&P500 were down 0.24% and 0.14% respectively
- UK economic data was all stronger than expected, albeit expectations were low for the post Brexit period. Retail sales rose 1.4% for July compared to a 0.2% forecast. Unemployment was 4.9% and the number of people claiming unemployment benefit fell in July. CPI rose 0.6% yoy beating forecasts of 0.5%.
- The Federal Reserve Bank of Kansas city is hosting central bankers and policymakers at its annual symposium on economic policy between 25 and 27 August. The focus is on ‘Designing Resilient Monetary Policy Frameworks for the Future’. Janet Yellen is speaking on Friday and we expect comments from attendees and officials to be reported in the media
- Commodities were down last week with oil down 1% to $48 and gold and silver lower as well
Credit indices spreads are largely unchanged over the last week with the US Investment Grade Index (IG) finishing Friday down 1bps to 70.5bps, whilst the US High Yield Index (HY) narrowed 6.5bps to finish Friday at 382bps.
Domestically, the 10 year Australian government bonds last traded at 1.905%, which is 2bps higher on the week. The Australian iTraxx is at 101.00bps (or 1.01% for this index of 25 Australian Investment Grade names), which is 2bps lower over the week.
Flows
The often hard to source Royal Women’s Hospital (RWH) fixed rate bond became available last week thanks to an institutional seller at an improved level. The investment grade bond with a 2017 call date, while higher risk, offers a good pick up over deposit rates, at 5.31% indicative yield to call. There are currently bonds available but with strong appetite from investors in the fixed short term space, it is expected supply will become scarce again.
With the AUD hovering just below 0.770 US cents last week non AUD bonds were traded heavily. The TransAlta Corporation’s fixed USD 2022 and 2040 maturity bonds – which were recently added to the DirectBond suite – remained in favour for a second week running, offering indicative yields to maturity of 4.45% and 7.25% respectively.
On the back of the strong FY16 results Newcrest announced last week, clients took profits and switched their USD 2022 and 2041 positions in to the TransAlta USD bonds of similar tenor. In doing so, clients were able to remain in USD while taking advantage of a pick up in yield. Both the Newcrest and TransAlta bonds are senior debt and are of the same credit rating.
As the thermal coal price creeps steadily higher, the Newcastle Coal Infrastructure Group (NCIG) USD fixed bond remains in demand, however supply in this bond has become harder to source. This has increased the price of the bond over the week, moving US$1 higher. The bond is currently yielding 10.60% to maturity.
Note: TransAlta USD bonds are available in minimum USD10,000 parcels. TransAlta are available to wholesale clients only.