News

NAB Group Economics has changed tack from its long held view that no official rate cuts will occur in Australia this economic cycle. The release of the shock March quarter CPI figures has swayed the Bank and it now expects a 25bps rate cut at the RBA board meeting on 3 May.

The latest release of CPI data produced quarterly and annual core inflation figures which are the lowest since the RBA switched to inflation targeting in the early-1990s. NAB says that “it now seems likely that the Bank’s Board will vote in May to take the opportunity to provide some slight further assistance to the Australian economy and so potentially help lower the unemployment rate more quickly than previously forecast.”

Despite their view, NAB is not super-confident about the rate cut, however, and qualified their view by saying it is 55%/45% chance. “At this stage we think that a further rate adjustment may be a close run thing” as they are “generally optimistic about the near-term performance of the Australian economy and labour market.”

YieldReport has written many ‘rinse and repeat’ headlines about bond market yields making record new lows over the past few years. It seems that bond investors around the world are caught in an Alice in Wonderland syndrome, questioning the very fundamentals of their investment philosophies as central banks continue to purchase more and more bonds to stimulate their respective economies and push bond yields lower and lower.

The Japanese bond market has now reached such ridiculously low levels it is distorting the investment landscape in previously unimaginable ways. This week, yields on 40 year bonds dropped below 0.30% as investors looked for anything with a positive income. Japan’s 2 year bonds reached a record low -0.265%. 10 year bonds traded at -0.126%.

Last week it was speculated that the Japanese government might consider issuing a zero coupon perpetual bond and this week the ruling party raised the possibility of a new ¥20 trillion bond issue (AUD$233 billion) to fund earthquake relief and boost a faltering economy. The Japanese government already holds around 30% of the bonds on issue through its QE bond purchases, tightening supply and forcing many of the Japanese pension funds to buy bonds regardless of their ridiculously low yields.

Japan’s debt is forecast to be around 250% of its GDP by the end of 2016. With a rapidly ageing population (average age 46.5 years), Japanese savers are being punished at the very time they are calling on their savings to fund their retirement. Nothing we have read or heard adequately explains how the Japanese government will unwind this mess and the time bomb of debt and ageing population cannot be too far off from exploding.

The Tasmanian Government’s financing authority, Tascorp, currently has six lines of benchmark bonds on issue in the domestic bond market, with maturities ranging from November 2016 to February 2026s. The average time to maturity is around 4.6 years (when weighted by face value). This may dramatically change soon as Tascorp has mandated several investment banks to issue a new 30 year bond.

A 30 year bond issue will lengthen Tasmania’s debt profile drastically and investors will be placing a large degree of faith in the Tasmanian economy. The new long dated debt issue is an interesting development and begs the question as to whether Tascorp is taking advantage of low rates and the demand for yield in the current environment to lock in a once-in-a-generation low cost of debt?

Fortescue has made a name for itself, not just in the iron ore mining business but also in the bond trading business. As recently as February, Fortescue took advantage of nervousness in corporate bond markets to buy back a chunk of its outstanding debt at a sizable discount to face value.

Now Rio Tinto, a blue-chip titan of global iron ore mining, has announced a tender for up to USD$1.5 billion of four different series of 2017 and 2018 bonds issued by Rio Tinto Finance plc. The offer is to buy 2017 and 2018 bonds, with the two series of 2017 bonds to be repurchased at US Treasury Notes + 30bps. Funds which are left over after this transaction will be available for a Dutch auction of two series of 2018 bonds, which will also be priced with reference to US Treasury Notes.

Three of the four series bonds in question are trading at close to face value after recovering from price falls early in the year. Assuming these bonds are purchased by RIO at a price not too different from the current price, Rio will make either a very modest profit or loss on the transactions. On the other hand, the 6.50% 2018 bonds were last quoted at closer to USD$109 per USD$100 face value and Rio would make a very definite loss if it were to purchase any of these bonds.

Rio is an exceptionally large company and potentially making a loss on the 6.25% bonds could be considered as just an inconvenience. A company with sales revenues in the tens of billions may well be justified in considering a few (tens of) millions of dollars as just loose change but typically a company repurchasing debt like this only does so if it can refinance the debt cheaper elsewhere or if it has excess cash. In the case of having excess cash, the company may decide that bond repurchases are the best use for the funds in the absence of any obvious acquisition targets or infrastructure investments. Any such loss however will preclude them from bragging rights when it comes to bond trading skills.

Capitol Health is about the join the ranks of the increasing number of issuers of corporate bonds in the local bond market. Typically the bond market in Australian has been the preserve of large corporates but in recent years more and more bond issues have been made by companies such as Capitol Health. The last unrated corporate to issue bonds into the domestic market was Impact Homes. In February it issued $45 million of 8.50% bonds and, while they were not vanilla bonds, they offer a useful comparison for a bond issue such as the one coming from Capitol.

Capitol plans to raise up to $50 million by issuing unlisted notes to professional and sophisticated investors. The notes will mature in 4 years but will be callable after two years and every six months thereafter. Annual interest will be payable in two instalment per year (that is, semi-annually) and will total 8.25% of the face value. Once all other terms and conditions have been finalised an Information Memorandum will be lodged with the ASX. NAB Capital is the sole arranger for the issuer.

This capital raising was first flagged in February and the proceeds will be used to replace bank debt, so debts levels will not change as a result of the new debt securities. Capitol Health chief John Conidi said the bond issue would diversify Capitol’s debt sources while lengthening the debt maturity profile.

The minutes of the April board meeting were released this week and once again they contained little in the way of surprises.

Many of the statements made were repeats of the ones made in the March minutes or very similar in sentiment; “Members judged that there were reasonable prospects for continued growth in the economy” and “very easy monetary policies were continuing to provide support to global demand.”

However, there were though quite a few changes in the “Considerations for Monetary Policy” section. Japan was not mentioned, emerging markets economies were seen as not faring well but advanced economies were acknowledged as having turned the corner; “growth in several advanced economies had led to a further decline in unemployment rates over the past year.”

In past minutes the RBA had commented how the currency “needed to adjust” or “was adjusting”. This time they acknowledged the currency was being driven partly by fundamentals and partly by central bank activities. “The rise in commodity prices had been accompanied by an appreciation of the Australian dollar, which also partly reflected the expectation that US monetary policy would be more accommodative over the coming year than had been anticipated earlier.”

Perhaps of most interest is the addition of a phrase to a statement which has been otherwise unchanged for some months. The sentence “Members judged that there were reasonable prospects for continued growth in the economy” was unchanged from last month but the addition of “with inflation close to target” is surely a tick for interest rate hawks.

Westpac said the key takeaways from the minutes were of an RBA which viewed the domestic economy in a more positive tone, has stronger expectations of continuing low inflation and is concerned by the recent appreciation of the Australian dollar against other currencies. Westpac noted how “the Bank is comfortable with current policy settings…although there are clearly risks around the outlook, particularly vis a vis the AUD.”

Click here for the full version of the April minutes.

Bank of Queensland (BoQ) is reported to be in the middle of a series of investor meetings this week, with a subordinated tier 2 (non-convertible debt) transaction expected to follow.

Recent transactions from BoQ suggest a preference for issuing floating rate debt. Back in early February the bank issued $400 million worth of floating rate 2018 bonds at BBSW + 100bps and prior to that, in October 2015 they issued $500 million worth of floating rate 2019 bonds at BBSW + 115bps. Floating rate debt has been increasingly more prevalent amongst issuers in recent months so it would be fair to bet on another FRN from BoQ if and when the bond issue is announced. BoQ is rated A- by Standard & Poor’s and A3 by Moody’s.

Despite what had appeared to be a preference for floating rate bond issues, WATC has just issued $1.1 billion of October 2022 fixed rated bonds. This new line of bonds is intended to be a benchmark series and therefore liquidity will be supported in secondary markets. Pricing was at the higher end of the 52-56bps indicative range with the final price set at ACGB + 55bps.  Bids in excess of $1.5 billion were received but in comparison with WATC’s previous FRN issue where pricing was at the lower end, the coverage ratio was considerably lower. This may be another symptom of the domestic bond market’s recent preference for floating rate issues rather than fixed rate ones, although the Federal Government still seems to have no trouble in issuing $2 billion worth of fixed rate bonds in any given week.

Standard & Poor’s (S&P) has announced the upgrade of GPT Group’s credit rating. The rating has been increased by one notch from A- to A. S&P said GPT’s preparedness to act in a disciplined financial manner while growing the group’s property portfolio had led to the upgrade. The higher credit rating comes with a “stable outlook” attached, which S&P says is premised on GPT continuing to act with the same prudence in the future. GPT is rated A3 by Moody’s.

It has only been six weeks since Argentina struck a deal with US-based bond holders which was viewed as allowing the South American country to return to international debt markets. Argentina defaulted on interest payments on its bonds in 2001/2002 and the South American country has been in the capital markets wildness since.

Now Argentina has cajoled Moody’s into raising the country’s credit rating to B3, which by the way is still sub-investment grade, all it needed for a bond market resurrection was a successful bond issue. Which is what Argentina has just announced.

USD$19 billion worth of bonds were offered for sale this week and the Argentinian Government received USD$68.6 billion worth of bids from investors. The large level of interest led to the bonds being sold substantially below indicative yields which started at 7% for the 5 year bonds, 8% for the tens and 9% for the 30 year bonds. By the end of the process, $2.75 billion worth of 2019 bonds were issued at 6.25%, $4.5 billion 2020s at 6.87%, $6.5 billion 2026s at 7.50% and $2.75 billion 2026s at 7.62%.