22 April 2024
Jenna Labib
Second chance to achieve 6%
Through the 2024 calendar year, the domestic yield curve has been largely range bound with our 5-year AGCB trading between 3.64% and 3.95%. With hotter than expected US CPI last week shifting the US treasury curve wider as investors/traders reevaluate rate cuts in the US, the Australian market has followed that move with 5-year Government bond yields surpassing their highs for the year (see chart below). We are likely to see continued movement in our yield curve with AU employment data released tomorrow and perhaps the most important factor in the RBA’s rate decisions being CPI, which will be released on the 24th of April.
AU 5-year Government Bond Yield
AU CPI Expectations
Recently issued HSBC 6.211 03/21/34 re-traces to near par
Issued in March this year the HSBC 6.211 03/21/34 has retraced from its peak secondary trading level of $101.625 to now pricing back near par. All the move is due to the recent interest rate shift higher with the credit spread remaining fairly constant. As IAM noted when HSBC initially came to market, we see value for investors at an outright return north of 6% to call and the recent shift in yields to the top of the range gives investors a second opportunity to achieve that return hurdle.
This was the first time HSBC Holdings issued in the AUD market. We note that the bank is a GSIB, so systematically important and as such, required to hold additional loss absorbing capital (which is a good thing for credit investors). At issuance, the book attracted 5.8bn of demand, which was the biggest tier 2 book on record. We have flagged recently that tier 2 books are achieving record bookbuilds and unprecedented demand, which reflects an increased allocation to fixed income across markets. This makes sense with equities near all-time highs and potential macro roadblocks ahead – high quality bonds act as a ballast in a portfolio, whilst currently achieving 6% returns.
Relative Value
HSBC is the only AU investment grade Tier 2 issue trading above the 6% hurdle on the sub 5-year call curve. We expect we will always see the issue trade wider than the majors due to a 2 notch rating differential, however the current circa 40bp pick up is 20bps wide of our assessment of fair value.
