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Weekly Highlights

Global equity markets ended last week weaker as a number of issues had a negative impact upon investor sentiment. Traders pushed the probability of a US rate hike from 63.9% to 70.2% which was surprising given the weak nonfarm payroll release (US unemployment report) on Friday. As a result, bond markets were also weaker as yields rose with the Ausbond Composite and Ausbond Credit Indices falling by -0.84% and -0.41% respectively. The second US presidential debate is also due to commence at 12.00pm today (Sydney time) and is expected to be watched closely following media revelations regarding the candidates over the past week.

Across the Atlantic, the UK’s Prime Minister (Teresa May) announced her intention to trigger Article 50 to leave the EU by the end of March 2017. Unfavourable comments by the French President (François Hollande) urging the EU bloc to lead tough negotiations with the UK to avoid contagion and protect the fundamental principles of the single market, are thought to have contributed to the pound sterling dropping over 8% in eight minutes of trading last Friday morning before recovering soon after.

Despite these events, the ASX200 Accumulation Index ended last week stronger, up 0.58%. Investors found favour in the energy sector as OPEC surprised markets by announcing a more disciplined approach to production to counter falling oil prices. The banking sector also found support following the much anticipated Parliamentary inquiry. Whilst some media commentators declared the proceedings a draw, we maintain the view that the regulatory pendulum will continue to swing towards more regulation over the coming years.

ASX listed hybrids generally finished the week up as trading margins continued to compress. The top three performers of the week were the Westpac Capital Notes 2 (ASX Code: WBCPE), the Tatts Bonds (ASX Code: TTSHA) and the Qube Subordinated Notes (ASX Code: QUBHA), returning 2.56%, 2.07% and 1.57% respectively as investors continue to seek yield in a low interest rate environment against the backdrop of limited primary issuance. QUBHA commenced trading on a deferred settlement basis last week and closed at a premium on Friday ($101.35). Last week the BondAdviser Income Plus Model Portfolio added the QUBHA security via an Initial Public Offering allocation (7% holding).

Unlike the retail bond market, domestic wholesale bond investors continue to be spoilt by new issuance. GPT tapped their August 2026 bonds (at a margin of 1.65% over the swap rate) for an additional $50 million and following their FY16 results announcement last Thursday, the Bank of Queensland (BoQ) also announced their intent to meet with wholesale bond investors. BoQ have $500 million of senior bonds maturing on the 7th of November 2016 that will need to be replaced and the forthcoming meetings are likely to address this.

Finally, the Australian Office of Financial Management (AOFM) are expected to issue an Australian government bond this week with a maturity date of 21 March 2047. Over the past few weeks the media have been reporting that foreign investors have been net sellers of Australian sovereign debt, and it will be interesting to see whether rating agency, Standard & Poor’s (S&P), declaration that Australia’s foreign debt has hit “extreme” levels that match the worst in the world, will have an impact upon the book-building process and ultimately pricing.

S&P placed Australia’s sovereign credit rating outlook on negative watch on 6 July 2016 following the 2016 Federal election. This has placed further pressure on all sides of politics to finalise a budget outcome to reduce the deficit significantly without negatively impacting Australia’s economic growth prospects. If S&P follow through and downgrade Australia’s sovereign credit ratings over the next 9-12 months this is expected to flow through to a one notch credit downgrade of various Australian State government and major Australian bank credit ratings.


Click below for Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

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

Chart 3: Term Deposit Review – September