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Weekly Highlights

Markets ended the week stronger as positive news for the healthcare sector (the government is deferring bulk-bill incentive cuts for pathology) was also supported by the ongoing rally in bank senior debt. Last week the average Major Bank 5-Year CDS (a proxy for their cost of new debt) reached its lowest point (0.98%) since January 2016. While we are still a long way off the recent lows seen in 2014 (~0.45%) sentiment for the sector has stabilised and hence why we are seeing new issues again. In a strange course of events we are now at a point where investors can switch out of major bank equity (i.e. CBA at 7.6%) and into Tier 1 hybrids of the same issuer (i.e. PERLS VII at 7.15%) for a fairly flat yield. Of course these securities have very different risk/growth profiles but if your expectation is for a gradual deterioration then we know which option we would select.

 

The pre-election Economic and Fiscal Outlook confirmed the divergence in assumptions for forward inflation. Wage growth has now slowed to a new record low of 2.1% (announced last Wednesday) and is running well below the budget assumed target. More importantly the budget inflation assumptions are now above the RBA and significantly above market consensus. Either way the divergence of forward assumptions is obvious and for income investors the primary question remains “will the RBA continue to cuts rates as a response to low inflation?”

 

The week was filled with corporate news from Coca-Cola Amatil (highlighted difficult trading conditions but stay committed to earnings growth with a conservative balance sheet and prudent capital expenditure program), Sydney Airport (awaiting a Notice of Intention from the Federal Government regarding the new airport) and Origin Energy (completed around half its planned assets sales including the sale of its Mortlake Pipeline).

 

New issuance activity was strong and reinforced a number of our assumptions.

Lendlease (LLC) issued a new 10-Year note in the US market for US$400 million. The margin was equivalent to ~3.26% above the 90-Day BBSW.

Insurance Australia Group (IAG) issued new 27-Year subordinated convertible note (NZ350m) for both institutional and retail investors in New Zealand. The interest margin was set at 2.60% over the 3-month bank bill rate.

– AMP Bank has launched a new Australian 5 year floating rate securities for institutional investors with an interest margin of 1.35% above the 90-Day BBSW.

QBE transacted a new Tier 2 subordinated deal to redeem £291m of existing notes. This security was priced at an equivalent of 5.06% over BBSW.

 

Click below for Interactive Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

Chart 2: Bonds vs Equities 2015/2016 (Monthly)