News

While Australian banks seem to be busy tapping the USD market, Korea Development Bank announced it will be returning to the Kangaroo market after an eighteen month absence to issue a new senior unsecured bond. The bank’s previous issue in this market was a $400 million dual tranche deal comprising fixed and floating 5.5 year notes.  Priced at Swap/BBSW + 110bps, the 2014 issue was arranged by ANZ, NAB and UBS. The bank is rated AA- by S & P and Aa3 by Moody’s.

The U.S Bureau of Labor Statistics released October CPI figures which were largely in line with market expectations. The headline inflation rate came in at 0.2% for the month, reversing September’s -0.2% result as energy prices rose and the USD paused its upward climb. The year-to-date figure was +0.1%, up from September’s comparable figure of 0.0% and in line with market expectations. Core inflation, which strips out the more volatile food and energy components, rose 1.9% for the last 12 months, the same as September’s figure of 1.9% and also in line with market expectations. The US 10 year bond rate finished the day lower, down 2bps to 2.25%.

ANZ said the data was “supportive of a December Fed rate hike.” Baillieu Holst took a similar view and said the “less than threatening US inflation numbers” cut back market expectations of a December rate rise but this would not change its own in-house view.

The minutes of October’s Federal Open Markets Committee (FOMC) meeting were released and as with the September minutes, they revealed little in the way of new information. The September minutes confirmed more than a few FOMC members believed the conditions necessary for a rate increase had been met or would be met soon and the latest minutes indicate that the Committee now believes the first rate rise will likely occur in December. “Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting.” However, the committee is not unanimous; “Some others, however, judged it unlikely that the information available by the December meeting would warrant raising the target range.”

Westpac said the labour market remains critical to the FOMC, pointing to the statement in the minutes: “Almost all members agreed…labor market indicators, on balance, showed that underutilization of labor resources had diminished since early in the year”. As for what happens after the first rise, Westpac noted the Committee’s statement “beginning the normalization process relatively soon would make it more likely that the policy trajectory after lift-off could be shallow” and said the statements mean a December rise followed by a series of spread out rises through is 2016 is likely. “All of this argues for a first rate hike in December, but a cautious FOMC through 2016.”  US cash markets reacted by increasing the odds of a December rate rise to 72% from the previous day’s figure of 64%.

Click here for the full text of the FOMC minutes.

US shoppers spent up on building materials before winter sets in, according to the latest advance US October retail sales numbers. The US Commerce Department released retail sales figures showing a 0.1% increase for the month, less than the 0.3% expected but higher than the September figures which were revised down from 0.1% to 0%. The US 10 year Treasury yield fell 4bps on the day to 2.27% as markets were generally unimpressed by the result.

The October figures are the eighth non-negative month in a row and represent a 1.7% increase from October 2014 which is less than the 2.2% year on year result for September. “Core” retail sales, which excludes cars and petrol, rose 0.2% instead of the 0.4% expected but was up on the revised September figure of 0.1%.

In September, car sales drove the US retail sales figure but in October this segment went into reverse and it was the building materials category which offset the ongoing fall in “gasoline” sales, with home furnishings, restaurants and bars the next largest growth segments.

After the report’s release, AMP Capital’s Shane Oliver said the Fed was constrained by the combination of soft retail sales, weak producer price inflation although he did note US consumer sentiment was up. ANZ said even though the data was less than markets expected, “it was sufficiently strong to support the commencement of a gradual tightening cycle by the Fed in December.”

Consumer spending is estimated to account for about two-thirds of US GDP and the retail sales figures are used to provide an insight into consumer spending behaviour.

NextDC Ltd announced it will be issuing senior unsecured notes shortly.  The company builds and operates data centres in Australia and New Zealand and is seeking to raise a minimum $70 million to fund the development of a new Brisbane data centre and for other general corporate purposes.

NextDC issued its series 1 notes in June 2014, taking in twice the $30 million it initially sought. The second series will have the same structure: the notes have an 8.00% coupon and June 2019 final maturity date; they are callable after 2.5 years (December 2016); and, every six months afterwards, with early redemption for tax events and change of control events. The first series of notes have a feature whereby if they are not redeemed at each six monthly call date, investors receive a bonus 0.5% per six months when they are finally redeemed. At this stage it is unknown as to whether the second series will have this feature.

Qantas has not paid a dividend since 2009 but after a corporate restructure, a return to profitability and repayment of some debt, the airline has regained some of it investment lustre by regain its “investment grade” credit rating. The rating agency Standard & Poors has upped the company’s credit rating from BB+ to BBB-, the lowest investment grade credit rating in the S & P definitions. While the BBB- rating increase is just one notch higher, debt with ratings of BB+ and lower are considered to be “junk bonds” while anything with a BBB- and higher rating is investment grade.

Even having this rating makes it a standout among the world’s airlines. There are only five others in the world with an investment grade credit rating. Having the BBB- rating can be the difference between investors and financial institutions who buy corporate debt being allowed (or not) by their investment mandates to buy Qantas debt.

Bank of Queensland announced it has mandated two banks to arrange the refinancing of the REDS Trust 2012-1E Class A2 RMBS notes. The original A2 notes were issued in 2012 and scheduled for maturity in late November and comprised one tranche denominated in pounds sterling and one tranche denominated in Aussie dollars.  It is expected the new securities will be issued at 1 month BBSW + 105-110bps.

ABS data released indicates a fall in new vehicle sales of 3.6% for October (seasonally adjusted), a reversal of the 5.9% rise in September and less than the -2.5% expected.  96,925 new vehicles were sold in October, compared to the upwardly revised September figure of 100,537. The year-on-year result of 3.4% was also lower than September’s 6.8%. All the States and Territories recorded falls except for the Northern Territory where the ABS suggests monthly numbers should be treated with caution.

The ABS released the October Labour Force figures which came in at a seasonally adjusted +58.6k, significantly higher than market expectations of a +15k increase. The local bond market saw an immediate jump in yields with 10 year yields rising sharply to just short of 3%, a full 9bps higher. Cash markets reacted sharply, sending the odds of two rate cuts next year back to zero and reducing the odds of one rate reduction next year from 100% back to 80%. The Aussie dollar rose nearly US1 cent against the greenback as markets factored in higher future interest rates.

The unemployment rate fell 0.3% to 5.9% while the participation rate rose 0.1% to 65.0% and the breakdown of the +58.6 jobs saw a rise of 40k full time jobs and an increase of 18.6k in part-time jobs. Total employment increased by 2.7% in the year to October. Seasonally adjusted monthly hours worked in all jobs increased by 19.1m hours in October 2015 to 1,660.4m hours, or by approximately 1.2% for the month and 2.8% for the year.

Justin Fabo of ANZ called it “startling strength” and while acknowledging the controversy regarding the data’s accuracy he said other indicators supported the idea of a growing jobs market. “While undoubtedly there is some noise in today’s data, underlying jobs growth has been strong for a run of months. Non-ABS labour market indicators have been solid/strong for some time, so today’s numbers might indicate some catch-up to those.”

ANZ has been forecasting two rate cuts next year but the latest data has placed those forecasts in doubt. “Perhaps the labour market is even better currently than we thought. If so, achieving a cash rate cut by February looks less likely at this stage.” UBS, Goldman’s and Macquarie have all removed their call of a cash rate cut this year. AMP’s Shane Oliver say there is now zero chance of a December rate cut with 2016 “line ball”.

The states with the lowest rates of unemployment were NSW (5.5%) and Victoria (5.6%) with NSW continuing its role as the largest employer of Australians. W.A went backwards, with the state’s unemployment rate rising from 6.1% to 6.4% while the state with the highest unemployment rate remains South Australia with 7.5%, although it has come down from the previous month’s rate of rate of 7.7%.

Everyone agrees that the corporate bond market needs to be more accessible to retail investors and the Australian Corporate Bond Company earlier this year launched its XTB product which aimed exactly to do that.

XTB’s are units that can be bought and sold on the ASX offering investors returns from a single corporate bond. Previously many of these bonds were only available to wholesale clients investing directly and with $500k to invest. In the XTB structure, the bond is essentially held in a unit trust with investors buying parcels of that bond via units in the trust.

ACBC had previously launched two series of XTB’s over a range of fixed rate corporate bonds from well-known companies. This third series, launched this week, offers investors units in floating rate notes/bonds. FRN’s as they are termed in the market, adjust their interest payable each quarter as referenced by the Bank Bill Swap Rate or BBSW. They are ideally suited in a rising interest rate market as the rate of interest paid is reset each quarter at the then market rate. Fixed rate bonds pay the same interest rate for the life of the bond.

XTB’s have a low minimum investment at $100 (although some brokers may impose a $500 minimum) and give investors access to an asset class on the ASX previously only available in the opaque, over-the-counter wholesale market.

The six, newly launched, FRN’s are the first XTBs to be launched over bank bonds. The bonds have been issued by AMP, Bank of Queensland (two XTBs), NAB (two XTBs), and Suncorp-Metway. The indicative current yields of the new XTBs range between 2.96% and 3.32% as at 10 November 2015.

ACBC CEO and co-founder Richard Murphy said he was pleased to be broadening the range of corporate bond opportunities available to retail investors. “We are excited about the potential opportunities these new XTBs can bring. XTB Floaters are high quality, capital stable instruments that share many of the attributes of cash investments and the benefits of trading on the ASX,” he said.

Among other features, FRN’s pay coupons quarterly until maturity, which may appeal to investors looking for a regular cash flow. Bonds in general are very secure with the capital guaranteed by the issuer to be returned at maturity. They are tradeable at any time so investors may find the capital value of bonds move over the life of the bond although the FRN’s should, in theory, trade close to the face value.
XTB’s are quoted on the ASX and can be bought and sold through financial advisers or stockbrokers.