Week in Review
The RBA noted it would consider buying bonds in future extreme circumstances at the September meeting. Governor Lowe also stated interest rates are getting closer to “normal settings”.
The Chinese central bank paused its monetary easing this week. The PBOC had good reason to keep interest rates unchanged, with the yuan under pressure ahead of an anticipated rate hike by the US Federal Reserve this week.
Trade Idea: NCIG Senior Secured
In consideration of positive developments, NCIG senior debt is now rated BBB/Positive from S&P. The junior financings (i.e., HIPRS and HITRS) have BB- ratings (being upgraded from B+) from S&P.
IAM’s Head of Credit Strategy, Matthew Macreadie discusses what this means from a financial and trading context.
Thought Piece: The Benefit of FRNs
In consideration of further rate increases from the RBA, fixed income markets are largely ‘pricing in’ the current rate hike cycle. Whether the market is right or not is another matter and often hard to predict. The market will form a path on forward rates expectations based on the outlook from the RBA, view on local inflationary dynamics, and global central bank activity.
Typically, investors will favour floating rate notes (FRNs) over fixed coupon bonds during a rate hike cycle as the coupon on FRNs ratchets upwards as rates increase. Conversely, fixed coupon bonds decline in value.
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Chart of the Week: Local Yield Curve
The local yield curve continues to flatten as short-term rates have been increasing faster than long-term rates. If we see a recessionary scenario play out, then we could see upside on those fixed coupon bonds as the curve should flatten and even invert (all-else-equal). Both in Australian and the US, markets are now pricing in rate cuts to start from the middle to late 2023. With this uncertainty involved, it is worthwhile having a diversified portfolio across floating rate notes (FRNs) and fixed coupon bonds to act as protection when markets melt down.
Source: BondAdviser
