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26 July 2022

Week in Review

The European Central Bank raised its main refinancing rate by 0.50% to zero, 25 basis points more than economists estimated, and have signalled that more hikes will be appropriate at future meetings.

Domestic yields bounced around last week, with the 3yr government bond trading within a 20bps range as traders prepared for key economic data releases this week. All eyes will be on Tuesday’s CPI figures.

Chart of the Week: Monthly Performance as at 30 June 2022

Equities had a horrible June, falling almost 9% – driven by a global sell-off on inflation fears as well as a larger than expected 50bps rate hike by the RBA at the start of June 2022. In contrast, the AusBond FRN managed to outperform and produced a tiny 0.05% gain. We believe investors should have a core floating rate exposure within their diversified portfolio. Floating rate bonds offer some protection against inflation but are by no means a perfect hedge, i.e., if the RBA doesn’t raise rates as fast as the market expects then FRN returns will lag inflation. However, if the RBA raises rates in line with the market and/or higher even, then FRN returns are improved.

Source: BondAdviser

Trade Idea: Ausnet Hybrids

With the Ausnet Hybrids, first call is October 2025 with first step-up date October 2030 (3mBBSW + 0.25bps), second step-up date in October 2045 (3mBBSW + 100bps).There are two real factors at play when considering whether a corporate will call a hybrid instrument:

  • Economic: Given prevailing funding costs, is it cheaper to hold onto funding rather than reissue and/or repay?
  • Equity Treatment: When does the company lose equity credit: Moody’s (50%) and S&P (50%)?

Credit Update: Jervois Q2 2022 Results/FY22 Guidance Lowered

Jervois (ASX: JRV) announced via its Q2 2022 results that it will be lowering its FY22 guidance due to lower cobalt prices and volumes. Given lower FY22 guidance, the JRV share price was down about 15%. However, cobalt prices are volatile, and it wasn’t long ago when cobalt prices were significantly lower than where they current sit (i.e., <USD20/lb).

While there is still risk for bondholders until construction is complete, this news is more concerning for equity holders who are valuing this company based on long-run through-the-cycle cobalt prices (remember: equity has no security as opposed to bondholders).

Top Duration Trades

This week, we’re looking at three top duration trades – all are investment grade and offer a yield to maturity (YTM) of 6% plus. We could look at the high-yield spectrum, but at the moment the rates on offer within the investment grade category stack up favourably versus high-yield.

Given the increase in government bond yields, it is a good opportunity to start adding duration back into portfolios – even selectively. However, it is important to get the right curve position. By buying longer-dated assets, expected returns are increased − but there is of course no free lunch.

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
John Deere Financial 4.900% A 28-Jul-25 4.900%
Ausnet Services Holdings BBSW3M+3.100% BBB- 07-Oct-25 6.757%
Westpac Banking Corp BBSW3M+1.800% A- 22-Jun-23 5.099%
Commonwealth Bank BBSW3M+1.900% A- 14-Apr-27 5.518%
AMP Ltd BBSW3M+1.800% BB 01-Dec-22 4.477%
UBS Group Ag 4.375% BBB 27-Aug-24 7.044%
Earlypay Ltd BBSW1M+6.250% NR 14-Apr-25 9.676%
Newcastle Coal Infrastructure Group 4.700% BBB 12-Feb-31 7.815%
MME Horizon Warehouse Trust BBSW1M+10.500% NR 18-Mar-25 13.929%
Hyundai Capital Services 3.500% BBB+ 21-Mar-25 5.346%

To discuss investment opportunities, please call

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