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Weekly Highlights – CBA Perls VIII and RBA

The CBA’s PERLS VIII (ASX code: CBAPE) began trading on a deferred settlement basis last Thursday. Positively, for the broader hybrid market, the CBAPE trading margin rallied 0.03% from its initial issue margin of 5.20%. In comparison, the trading margin of the ANZ capital notes (ASX code: ANZPD) have rallied from 5.81% in mid-February to 5.34% currently. On the 15th of February investors had a choice to allocate capital to the new CBA issue or buy existing hybrids in the secondary market. As a result, buying the secondary market rather than investing in the CBAPE’s has been the superior short term strategy especially in short to mid dated hybrids.

 

The chart below shows the hybrids that have rallied between the 15th February and 1st April

Source: BondAdviser as at 1st April 2016

 

The CBAPE’s first two trading days saw relatively heavy volume passing through the market with 76,622 and 21,863 units being turned over on the 31st March and 1st April respectively (a whopping 23% of hybrid turnover on their first trading day and a more muted 6% on the second trading day).

 

The CBA surprised the market by upsizing the issue to $1.45 billion (the preceding CBA PERLS III issue was $1.167 billion). The largest holding according to the ASX announcement is BNP Paribas Nominees Pty Ltd (19.66% of the issue or 2,850,008 units). The size held by BNP suggests one or more institutional parties may be holding a large block of securities. We will be watching to see whether this has an impact upon secondary market margins for this issue over time.
Click below for Interactive Charts

Chart 1: Bloomberg AUSBond Composite Index (Monthly)

Chart 2: Bonds vs Equities 2014/15/16 (Monthly)

 

Interest Rates

This week kicks off with four data releases covering inflation, retail spending, building approvals and job advertising. This is unlikely to sway the RBA in their decision tomorrow as the resilience of recent economic data asserts that the cash rate will remain unchanged at 2.00% p.a. over the coming months.

 

The RBA remains confident in their neutral position but the recent strength in the currency will likely lead to further “jawboning” and if this fails we may see further cuts to rates.

 

Last week US employment data to show growth with 215k new jobs added. As a result, employment growth is back to pre-GFC levels but Janet Yellen and the Fed are still cautious in raising interest rates. We will be given greater insight into this when the minutes of the March Federal Reserve meeting are released on Wednesday.

 

In February 2015, the 10-year bond yield hit an all-time low of 2.27% before lifting to highs near 3.15% on 11 June 2015. In early November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. Since mid-December the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and on 1 March 2016 hit a 6 month low of 2.35%. In the past few weeks we have seen a sharp bounce back up but the yield is now consolidating around 2.60% (current 2.53%). The 3-year bond has followed a similar pattern and broke out of its recent yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18% on 7 December 2015. It retraced back to a short term low of 1.70% but then jumped back up to 1.94% in the past week. On 1 April 2016, the ASX 30 Day Interbank Cash Rate Futures April 2016 contract was trading at 98.015 indicating a 7% expectation of an interest rate decrease to 1.75% at the next RBA Board meeting (no change from the previous week).