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1 July 2022

Week in Review

  • RBA Governor Philip Lowe announced the Reserve Bank will hike in 25 to 50 basis point steps in the fight to cool inflation. The comments quelled traders’ bets on a 75bp hike for July and sent Aussie benchmark yields lower.
  • US market sentiment rebounded last week as a gauge of longer-term inflation expectations revised a previously reported 14-year high. Comments from the US Fed Chair to Congress also seemingly curtailed recession worries, allowing the S&P 500 to snap a three-week losing streak.

Chart of the Week: DB Survey - When do you think the next US recession will occur?

In terms of preliminary responses, the risk of a US recession in 2022/2023 has been building in recent months. However, the bulk of the data surveyed points towards a 2023 rather than 2022 event. This would imply the market narrative of a more imminent US recession has moved quicker than the responses on this survey.

* Covers around 400 global responses.

Source: DB Research

Credit Update: Crown Return

Holders of Crown hybrids now need to establish what to do with their capital given the listed corporate hybrid market remains very small comparable to the OTC corporate bond market.

In our view, one name in the listed corporate space which offers good value is the Nufarm (NFNG) Perps. If investors prefer listed financial exposure, then the Australian Unity (AYUPA) Perps would be the best bet. Both of these lines offer above 8% on a yield to maturity (YTM) basis. We currently believe the listed financial hybrid space (mainly comprised of the major banks) is pricing tight versus their OTC equivalents. This was evidenced with the new Westpac (WBCPL) margin guided at 3.4-3.6% above 3m BBSW, which was very tight in our opinion.

Credit Update: Suncorp Group - Is T2 Paying Enough Given the Downside Risk?

Various articles have surfaced that Suncorp Group might be spinning-off (for a demerger) or selling the bank. This is not new news and interestingly surfaced at a time when Volt Bank has decided to exit the banking industry after 3.5 years. Volt had obtained an unrestricted ADI license from APRA in 2019. It intends to return all funds to depositors and give up its banking license.

In a volatile market as funding costs rise and sources of capital dry up because of investor angst, it will be testing time for other companies as well that began operations in recent years. For subordinated T2 and AT1 investors at the Suncorp Group, it’s worthwhile considering the implications and examining whether their current exposure to Suncorp Group is appropriate. Note, there is no change of control for T2 and AT1 investors, so one is left unprotected in this situation.

Thought Piece: Investment grade fixed income on comeback trail as higher yields offer competitive returns

Aussie fixed income investors have had a rough ride in recent years with interest rates at record lows of 0.1%. But while the Reserve Bank of Australia (RBA) was saying there would be no interest rate rises before 2024, rising inflation has forced a tightening of monetary policy in 2022.

The 50 basis point increase we saw in June and the 25 basis point increase in May has pushed the official cash rate to 0.85%. The RBA is essentially an inflation-targeting bank. Governor Philip Lowe forecast inflation could reach 7% by year’s end − well beyond the target of 2-3%. Economists predict further rate rises in the coming months, including another bumper 50 basis point hike in July − which would leave the cash rate sitting at 1.35% − as the RBA moves to bring inflation under control.

Most Traded

The table below outlines our most frequently traded issues over the past week.

Issuer Coupon Rating (S&P, Fitch, Moody’s) Call Date Yield
Westpac Banking Corp BBSW3M+0.830% AA- 06-Mar-23 3.339%
BNP Paribas 3.695% A+ 24-Feb-27 6.239%
BNP Paribas 4.500% BBB 10-Jan-25 6.467%
Aust & NZ Banking Grp/UK 6.750% BBB 15-Jun-26 6.772%
Seek Ltd BBSW3M+3.700% NR 20-Jun-23 6.680%
AAI Ltd BBSW3M+3.200% A 06-Oct-22 4.454%
Bendigo and Adelaide Bk BBSW3M+2.450% BBB 30-Nov-23 5.430%
Barclays Plc 5.875% BBB- 15-Sep-24 8.054%
Pacific National Finance 5.400% BBB- 12-May-27 6.570%
Air New Zealand Ltd 6.500% Baa2 25-Feb-29 6.990%

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