YieldReport has been alerting readers to an increase in corporate bond spreads in the US and increasing spreads locally, particularly in mining based stock spreads to ACGBs. The iTraxx Australian CDS index is a good proxy for this risk and is worth monitoring closely at present. Two weeks ago it had risen above the 150 level, only to drop back again as attention faded from the woes facing resource and energy companies. However, it finished the week at 152 as Qantas, Rio and Woodside CDS prices rose significantly. Surprisingly, BHP’s CDS price moved relatively little. An increase in the cost of insuring corporate bonds against default does not necessarily mean defaults are imminent. It is simply that investors are seeking to protect themselves against an increased risk of default.
It was a relatively sedate week for issuance with just over $2 billion of bond sales by local issuers compared to just over $5 billion from the week before. All of the bond issues were from banks, with ANZ the most active and most issues were offshore.
Bank of Queensland was the only issuer to do anything in the local currency, selling $400 million of 2018 FRNs at BBSW + 100bps. The bank’s last FRN issue was back in October when it sold $550 million worth of 3.5 year FRNs at BBSW + 115bps.
ANZ (NZ) acquired the recent preference for bonds denominated in Swiss francs and issued CHF225 million (AUD$313 million) of October 2023s at BBSW + 164bps (once swapped back into Aussie). ANZ (NZ) issued USD$50 million worth of zero coupon February 2021 bonds. The bank also made the largest deal of the week with a sale of £500 million (AUD$1.01 billion) covered February 2021 floating rate bonds at 3 month Libor + 50bps. It also issued USD$20 million (AUD$28 million) worth of 2 year covered FRNs into the US market at 3 month Libor + 92bps.
Commonwealth’s UK issue was not quite as large as ANZ’s; the bank sold £100 million (AUD$205 million) worth of August 2018s at Libor + 70bps. Westpac looks as if it tailor made two renminbi bonds, issuing CNY200 million (AUD$43 million) worth fixed 5.30% February 2018s and CNY150 million (AUD$43 million) fixed 5.40% February 2020s while Macquarie Group issued USD$20 million (AUD$28 million) of fixed 2031 bonds.
It was a quieter week in the Kangaroo market, with just over half a billion worth of bonds. A full list of issuers and spreads are set out in the tables below.
In a note to clients this week CBA suggested investors look at shorting Wesfarmers 2019 bonds to buy Woolworths 2019 bonds. The chart above shows each bond spread against ACGB 2019 bonds. The trade idea is that Woolworths is cutting its loss making Masters franchise while Wesfarmers, through its Bunnings subsidiary, will takeover the UK’s 265 Homebase hardware stores.
In a move which surprised absolutely no one, S&P downgraded BHP’s credit rating while the agency also put RIO on “credit watch negative”. S&P said BHP would need to review its dividend policy or another rating downgrade would result down the track. BHP said it has no intention of changing its dividend policy and so another downgrade is looking likely.
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AUS CORPORATE BONDS
|ISSUER||MATURITY||COUPON (%)||RATING||WEEK |
|Δ WEEK||Δ MONTH|
|Wells Fargo & Co.||27-Aug-24||4.75||A+||3.90||3.84||3.86||-0.06||-0.21|