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Weekly Highlights – 3 June 2015

The retail market has been fairly quiet over the past few weeks in terms of deal flow with Bank of Queensland and Australian Natural Proteins (high yield unrated transaction) being the only issuers worthy of note. The US and European wholesale markets continue to be preferred options for borrowers of senior debt as price and term options are more favourable there. With 27 days to go until the end of financial year we expect things will remain  quiet for retail issues with investors focusing on capital gains / losses on share portfolios rather than income securities. The Aussie dollar remains volatile (it reached just over 81c before falling back to 0.76c) as foreign policies and uncertainty in the domestic economic environment prevail. The RBA left rates unchanged yesterday and with quarterly GDP data released later today uncertainty surrounding the future direction of interest rates will prevail. Internationally, there is plenty of  US economic data releases and the deadline for Greece to meet (or miss) its 300 million euro payment to the International Monetary Fund this Friday.

The domestic yield curve remains in flux with a number of structural factors in the market suggesting a bull market for the US Dollar over the next few years and potentially a lifting in the Fed Funds Rate later this year. This cash rate “normalisation” is possible in the short term but  will create economic headwinds for the US especially as the rest of the developed world will be continuing QE and/or ultra-low cash rate policies. The negative US GDP data on Friday night was widely expected by the market . Provided the employment and inflation figures continue on their current trajectory the US yield curve will continue on its volatile “normalisation” path. This is broadly negative for global fixed rate bond markets and hence why we continue to recommend short duration or floating rate instruments.

In other news the CEO of the Australian Securities Exchange came out last week questioning the lack of action from the government in reforming the domestic corporate bond market. “Corporate bonds continue to be one of our biggest frustrations,” and “I have been talking about it for four years now. We are big fans of the Murray recommendation – it is not particularly innovative, because it is a well-trodden path in countries like Singapore, NZ and the UK, so we should simply get on with and implement the recommendations and I for the life of me can’t understand why it hasn’t been done.” This is not news  and we hope that reform is on the way . Given the amount of issues confronting parliament at present and the lack of interest to date we are not holding our breath.


 

Figure 1. BondAdviser Recommendations Heatmap