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Bell Potter’s fixed income desk has nominated Macquarie Group Notes (ASX code: MQGPB) as its buy of the week. It said, “The combination of the 5.15% issue margin and the cash top up required from 40% partial franking produces the highest cash component of any bank or financial hybrid security.”

The yield has fallen (the security’s price has risen) since the recommendation came out but as readers can see from the chart below the trading margin is still among the highest available (at the close of business on 6/06/2016).

Transurban has been a sporadic issuer of corporate bonds, both at the group level and via its subsidiaries and joint ventures. Its last foray into the bond market was in October when it issued USD$550 million (AUD$764 million) February 2026 bonds in October 2015 at Treasury’s + 220bps. Now its 50% owned WSO Finance Pty Ltd has announced it will be holding investor briefings in Australia and through Asia starting from the middle of June.

WSO Finance is the financing entity within the Westlink Motorway Group. The investor briefings are expected to host the marketing of WSO’s recently proposed $1.5 billion medium term note (MTN) programme. Moody’s has assigned an A3 rating to the MTNs.

This week saw two of the USA’s most recognisable companies launch bond issues in the Australian market; Apple Corporation and the Coca Cola Company. While both were greeted with strong demand – the Australian market is in need of more quality non-financial corporate bonds – it was of interest to note that the CCC bonds were issued below the rate of the Apple bonds.

Apple has a credit rating from Standard & Poor’s of AA+ while CCC is rated an AA- credit risk. Under normal circumstances a company with a higher credit rating should be able to issue bonds at a lower yield, reflecting its higher creditworthiness. As can be seen from the table below this was not the case this week:

The pricing issue perplexed a number of market watchers with the consensus suggesting that there was no single reason for the discrepancy. Reasons flagged were the fact that CCC has been issuing bonds a lot longer, the market for CCC is globally more liquid, the company is more diversified and a consumer staple company rather than one in the more volatile IT sector. Ratings are not the be all and end all when it comes to pricing and the market itself appears to give Apple a lower rating than the main rating agencies.

Apple Corporation stunned Australian markets last year with its inaugural bond issue in $AUD. This week, in further validation of the depth of the Australian bond market, it returned to Australia to issue three new tranches of bonds; a 4 year, a 7 year and a 10 year.

The initial guidance for the deal was 85bps, 125bps and 135bps over the respective swap rates. Final pricing saw the 4 year tranche come in tighter at 82bps over Swap and the 7 year and 10 year printing at the initial guidance rate. Deal sizes were as follows: 4 year, $650 million, 7 year $450 million, 10 year $325 million. Issue yields were; 4 year 2.676%, 7 year 3.36%, 10 year 3.61%.

Pricing was wider than Apple’s inaugural deal in August 2015 when the fixed 4 year tranche went at Swap + 65bps and the 7 year fixed tranche went at Swap + 110bps.

The 10 year deal appeared to be added after initial investor meetings and demonstrated the support for strong non-financial bond issuers. Apple is rated AA+ by Standard & Poor’s.

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NAB’s latest hybrid security offering has had its margin set at the lower end of the indicative range after the early close of a book-build process. The margin on NAB Capital Notes 2 has been set at 4.95% and, when added to the current 90 day bank bill swap rate (BBSW) of 2.00%, investors will receive an initial 6.95% pa, inclusive of franking credits. The actual amount of income investors receive over time is subject to changes in the BBSW rate, which tends to follow the official cash rate closely (see below). The first distribution will be paid on 7 October 2016 and the amount will be based on the BBSW rate on the first business day of each payment period. The first payment period begins on 7 July 2016.

The book-build was closed earlier than scheduled on what NAB described as “strong demand”. $1.35 billion of hybrids have been allocated to institutions and stockbrokers’ clients but the final numbers will be dependent on the number of securities allocated under the Securityholder Offer.

Hot on the heels of Westpac’s $175 million issue of new Tier 2 notes, the bank has announced an issue of Tier 2 June 2026 bonds. Denominated in yen, they have the increasingly common non-viability clauses, which if triggered would allow the write-off of these notes or the conversion in to ordinary Westpac shares. Nothing is especially unusual about this issue of notes, except for one thing; they are bearer bonds. Legally, the person holding them is the person who owns them and they are almost as good as cash. Bearer bonds have been illegal in the US since 1982 as they have often been used to conceal ownership and avoid taxes or scrutiny.

They are being issued in Japan where 10 year bond rates are negative. Savings accounts rates are also low. Yet these bonds have been issued at an interest rate of 1.16%. Each bond has a face value of ¥100,000,000 or about AUD$1.25 million and only 102 are being issued for a total of ¥10.2 billion (AUD$130 million). So these bonds pay a positive rate of interest and are easy to store. All sorts of Japanese investors would find the pieces of paper attractive.

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Four months after flagging a bond issue in the Australian market and three months after suffering a credit downgrade, the Coca Cola Company (CCC) has joined the rush of companies who have recently issued bonds. The Atlanta-based company has issued $1bilion worth of bonds in two tranches comprising $450 million June 2020s and $550 million June 2024s at Swap + 67bps and Swap + 105bps respectively, which is not too far from guidance levels.

Regular YieldReport readers will recall how Apple and a host of other US companies have been sitting on piles of cash outside the US. Repatriating that cash will see them hit with tax at the US corporate rate of 35%. By issuing bonds outside the US the company can raise money for buy-backs or other corporate purposes without triggering the tax payment. CCC is one such company with a large pile of cash outside the US and YieldReport understands this to be the driver of the bond issue.

Coca Cola Amatil, a company listed on the ASX, is 29% owned by CCC.  While Coca Cola Amatil has been a regular issuer of bonds locally, this is CCC’s debut bond issue in the Australian market. CCC is rated AA- by Standard & Poor’s and Aa3 by Moody’s Investor Services.

For a short time early in the year there was a trend for semi-government issuers to favour floating rate notes. However, a new trend seems to be emerging. State borrowers are now issuing fixed rate bonds again but maturities appear to be lengthening.

Tascorp began with a new 2046 bond issued in April, followed up with a $450 million tap in May. Now WATC has raised $700 million via a new benchmark with an October 2027 maturity. It is possible a sample size of two is not exactly convincing evidence of a trend but it would make sense for issuers to lock in funding for lengthy periods if they think rates are unlikely to average less over the life of the bond than what they are now. The yield to maturity on the WATC bonds was 3.005% and if the RBA succeeds in raising the inflation rate the real (after inflation) cost per annum will be very little.

There’s no shortage of demand for these bonds either, even if interest rates are historically low. The joint lead managers to the issue, Commonwealth, ANZ and UBS, reported orders of around $1.2 billion by the time the price was set. While some of us may look at the interest rate and wonder why investors would bother, there are more than a few experienced bond fund managers who believe there is money to be made from further falls in yields and what is referred to as “roll” or the natural fall in yields as time passes and the bond gets closer to its maturity date.

Bond raisings continue to come thick and fast. Commonwealth Bank had announced the pricing of $750 million worth of floating rate notes with a June 2026 maturity and a June 2021 call date. Prior to the price setting, the new subordinated FRNs had an indicative range of 3m BBSW + 265-285bps. Final pricing came in at the bottom end of the range at 265bps, suggesting strong investor interest.

The new notes are designated as Tier 2 securities for APRA purposes and contain a non-viability trigger clause. This may explain why these FRNs were priced at BBSW + 265bps, whereas Westpac’s recent issue of $1.8 billion worth of June 2021 FRNs were priced at BBSW +117bps. The non-viability trigger could entail these notes being exchanged into ordinary CBA shares worth less than the $100,000 face value or indeed written off.

For the second consecutive quarter, Australia has recorded annual GDP growth of 3% or better. The economy grew by 1.1% over the March quarter which was higher than the median forecast rate of 0.8%. The Australian economy grew by 3.1% on a year-on-year basis, again higher than the 2.8% expected by economists.

All of the increase was due to the export sector. The net exports component of GDP accounted for the entire 1.1%, with other growth components balancing off against each other.  Exports grew by 4.4% while imports declined by 0.8% over the quarter. Iron ore and coal volumes rebounded after a weak December, while LNG volumes continued to ramp up as projects move towards capacity.

The currency market reacted to the figures by sending the AUD up 0.5 cents higher against the USD while the bond market’s reaction was more muted. 10 year bond rates rose 2bps before ending the day 1bp higher.

Here’s what the economists said:

Felicity Emmett, ANZ
Inflation is the main game for the RBA at the moment, and today’s report shows ongoing soft price pressures in the economy.

Chris Caton, BT Financial Group
Although the “cockroach” theory suggests that rate cuts are rarely solitary, the solid growth shown today, along with the building approvals data yesterday, and the continued firmness of house prices may cause the RBA to wait for more evidence before cutting again. If it happens, it is now far more likely to be August rather than June.

Gareth Aird, Commonwealth Bank
Nominal GDP, which is the broadest measure of income in the economy, and is effectively the tax base, grew by less than real GDP….we expect further monetary policy easing and have pencilled in two more rate cuts that would take the cash rate to just 1.25%.

Paul Bloxham, HSBC
Our view is that the RBA will probably cut its cash rate by a further 25bp to 1.50% in August, following the Q2 CPI print and then hold steady at 1.50% in subsequent quarters.

NAB Group Economics
The GDP deflator – the broadest measure of inflation – recorded a decline of 0.6% in the quarter, while the consumption deflator fell 0.1%. The RBA is likely to look through the strong Q1 GDP result given it was largely due to a lift in exports that is not expected to be sustained in the medium term. At this stage, NAB expects the RBA to remain on hold for the remainder of 2016, though we do acknowledge a further rate cut remains a possibility if inflation continues to surprise to the low side.

Scott Haslem, UBS
The weakness in the nominal economy, including profits & wages, remains the key caution, albeit the recent steadier commodity price environment may be flagging that this drag may soon ease. Today’s GDP data adds to the upside risk already in our 2016 year-average GDP forecast of 2.5%, and challenges those looking for the RBA to cut the cash rate to 1.0%

Westpac Economics
“On prices, the National Accounts did not provide any new information but rather confirmed the disinflationary picture evident in the Q1 CPI report…We continue to expect the RBA to respond to current inflation weakness with a follow-up rate cut in August.”