News

The Sydney Futures Exchange, March 2016, 3 and 10 year bond futures contract expires on Monday 15 March 2016 with the ‘quarterly roll’ to the June 2016 contract completing on that day. The basket of physical bonds that underlie the two contracts value are unchanged as follows:

The 20 year bond futures contract also expires on 15 March 2016 and rolls to the June 2016 contract. The underlying basket of bonds has added the 3.25% June 2039 bond.

Fortescue has scored another credit rating downgrade, this time from Moody’s Investor Services. Fortescue’s rating has been lowered one notch from Ba2 to Ba3 with a negative outlook. Moody’s began its review of Fortescue in late January amid widespread commodity price weakness and the downgrade is a result of Moody’s view of a downward shift in the iron ore market. The downturn is expected to be deeper and longer, not only for Fortescue but the whole of the global mining sector. Moody’s acknowledged Fortescue’s improved balance sheet ratios and described November’s debt repurchase offer as “credit positive” but the rating agency expects global conditions to weaken FMGs leverage ratios further.

The European Central Bank last night announced sweeping new measures to stimulate the European economy but perhaps undid the impact of such a move by indicating at a later press conference that there further interest rate cuts are unlikely.

The changes announced initially pleased financial markets. Westpac described the changes as “over deliver[ing] in spades”.

So firstly, what are the ECB policy changes?

1. ECB deposit rate cut from -0.30% to -0.40% (overnight lending rate to ECB)
2. Marginal lending facility from 0.30% to 0.25% (overnight borrowing rate from ECB)
3. Refinancing rate from 0.05% to 0.00% (borrowing rate from ECB for up to one week)
4. Targeted long term refinancing rate operations (TLTRO) rate to equal refinancing rate
5. QE increased from €60 billion per month to €80 billion per month
6. Expand the range of securities to be purchased

The changes by themselves were huge. According to JB Were, there were two surprises in particular that markets liked; the cut in the refinancing rate and a €20 billion increase to €80 billion per month in the asset purchase programme instead of the expected €10 billion.

However, comments made by ECB president Draghi in the Q&A session which followed reversed any positive impact made in the press release. Among them were Draghi’s comments which indicated deeper cuts in the deposit rate may hurt the banking sector. Bond yields which had fallen after the initial announcement reversed direction and then rose past their starting points. By the end of the European day, US, UK and German 10 year bond yields had risen between 5-7bps, equity markets sold off and the euro strengthened against major currencies. Investors appear to have positioned themselves for the likelihood of further investor-friendly/weak euro policies but as ANZ put it, “The market interpreted all that [Draghi’s comments] as meaning the ECB has reached the limits of its interest rate cutting cycle.”

The ECB and its president is getting a reputation for not meeting market expectations and being “behind the curve”. The last time the ECB cut rates in December, markets were expecting larger cuts or effectively what was delivered in last night’s changes. The Bank is also at risk of losing credibility with markets as the messages it is sending seem to be confused and lacking consistency, which may be the result of divisions within the ECB board.

At any rate the ECB, if required, may need to look for new measures to stimulate the economy in future as the money printing and negative interest rates seem to be having less of an impact or as one commentator put it, Quantitative Exhaustion.

Click here for the actual ECB statement and here for the ECB press conference Q&A

New Zealand’s central bank has surprised markets this morning by announcing another official rate cut only three months after the last one. Governor Graeme Wheeler announced the 25bps reduction to 2.25%, citing a deterioration in the global growth rate, increased financial market volatility, higher credit spreads and low commodity prices. Of particular concern to New Zealand is the state of milk prices. Headline inflation low on the back of fuel and import prices, although the core inflation estimate is running at a higher rate.

The RBNZ is particularly concerned by New Zealanders’ estimates of future inflation, known as inflation expectations. Usually expectations run consistently higher than actual inflation but the RBNZ is worried “the decline in expectations becomes self-fulfilling and subdues future inflation outcomes.” The statement also refers to New Zealand’s trade-weighted index as 4% higher than forecast in December and attempts to “jawboning” the currency down, stating “a decline would be appropriate given the weakness in export prices.” A lower currency would make New Zealand exports more competitive and aid local manufacturers compete against imports. However, the RBNZ remains optimistic regarding NZ’s GDP prospects saying, “…domestic growth is expected to be supported by strong inward migration, tourism, a pipeline of construction activity and accommodative monetary policy.”

The RBNZ has tried to end on a positive note despite maintaining an easing bias. “Headline inflation is expected to move higher over 2016”. It then gives what has become standard central bank mantra of stating it “will continue to watch closely the emerging flow of economic data.”

For the full statement click here

CML Group, a finance, payroll and employment services company listed on the ASX has announced its second issue of senior secured notes in the last 12 months. The new notes will have a March 2022 maturity and the company is seeking a minimum of $20 million but will take oversubscriptions to $25 million. The transaction looks very similar in structure to the company’s May 2015 sale where CML issued $25 million 2021s FRNs at 1m BBSW + 540bps. The CML bonds are unrated and will be issued through FIIG Securities.

The Westpac-Melbourne Institute Consumer Sentiment Index fell unexpectedly by 2.2% in March to 99.1. A reading below 100 suggests pessimists outnumber optimists. The index had been improving of late so the latest number is seen as a bit of a setback. Sentiment in March was affected by political in-fighting and press coverage of possible changes to negative gearing, which in turn affected perceptions relating to personal finances.

We know that the market takes notice when Warren Buffett makes a move and the market certainly noticed his latest foray into the bond market.

Berkshire Hathaway announced it would be issuing USD$10 billion worth of bonds and investors quickly lined up to take part. The bonds are to be issued in several tranches and will be used to re-finance bank debt taken on as part of the USD$36billion Precision Castparts acquisition in 2015. One tranche of 5 year FRNs has been pulled from the offering and the total value of bonds on offer pared back to USD$9 billion but the remaining tranches include fixed and floating rate paper over 2 years and 3 years and 5 year, 7 year and 10 year fixed rate paper. The order book for the deal is said to have reached a staggering USD$34 billion. Price guidance on the deal was unavailable but the company had previously issued 10 year paper at US Treasurys + 130bps.

It seems as if the Coca-Cola Company was only delaying its expected bond issue, which was initially flagged in mid-February. CCC copped a one notch rating downgrade from Standard & Poor’s to AA- in late February but now that’s out of the way, CCC has restarted the process and is understood to be about to wrap up an investor roadshow for its inaugural Kangaroo bond issue. It’s something bond investors will be looking forward to as a bond sale from CCC will add some diversity to the list of AA rated issuers in the Australian market.

So far this March is proving to be a rather popular time for bond issuance with all the major Australian banks hitting the markets for funds, often in the US. In the second week of the month, the value of bonds issued already exceeds the value for the whole of February and is likely to exceed the $20 billion worth issued in January.

Unemployment in the US remained steady at 4.9% as the US created another 242k jobs in February. The number of jobs was more than the market expected (195k) and the unemployment rate was stable despite a rise in the participation rate from 62.7% to 62.9%, which implies the US economy is creating enough jobs to absorb new entrants into the work force. On top of the strong figures for February, the previous two months were revised up 30k.

US interest rates rose on the news. 2 year bond yields rose 2bps to 0.86% and 10 year bond yields finished the day at 1.87%, up 4.5bps.

Westpac and Goldman Sachs both described the report as “strong” but each pointed to the weaknesses in some of the data within it. Hourly earnings fell in the month to be 2.2% higher than the same time last year.

Westpac pointed to the “soft earnings, a fall in hours worked, and a skew toward health and education jobs” while Goldman Sachs said the release contained “mixed details…[which] served to keep the idea of Fed tightening in play without mandating a hike at the bank’s March 15-16 meeting.”

Pepper Group will be meeting with Australian investors in what is likely to be the prelude to a capital raising. According to the joint-lead managers arranging the meetings, a non-conforming RMBS issue is expected to follow, which would make it Pepper’s first issue of 2016. Pepper last visited the RMBS market in late October when it issued $300 million worth of securities in a five tranche deal.