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The following is a summary of the key events impacting fixed income markets over the past week.
Over the last week or so most of world’s central banks have delivered monetary policy statements and assessments on their respective economies. While we all wait for the US to ‘come right’, policy makers from the UK, Europe, Australia and locally highlight the vast divergence of these economies.
RBA v RBNZ, BoE v ECB, all versus the Fed
The recent central bank commentaries from the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) highlight where the respective economies are at. While the RBNZ is implementing alternative tools to avoid raising the OCR due to a growing economy, the RBA remain confused about where their economy is headed post the mining boom. ‘Expert’ forecasts are spread far and wide as to the next move from the RBA.
It is a similar story in Europe where the European Central Bank (ECB) are battling to stave off deflation as they head towards some form of quantitative easing as they have nearly run out of bullets in their ‘cash rate’ gun. Contrast this to the UK, where new Bank of England (BoE) governor, Mark Carney, is trying to pull back a market that is now expecting interest rate hikes to occur, and hence pushing the Pound higher and higher.
The only similarities between the economies are their strengthening currencies against the USD as the Fed maintains its easing stance for some-time yet.
The RBA kept its official cash rate on hold at 2.50% on Melbourne Cup day citing a couple of positives, mainly: “further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook.”
The RBA also threw some caution with: “Public spending is forecast to be quite weak and the Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.” As evidenced by the confusing commentary, two of the ‘big four’ banks are still forecasting the next move from the RBA will be a cut.
ECB acts on deflation fears
The ECB surprised many by reducing its benchmark interest rate to a new record low of just 0.25% The ECB kept its deposit rate at 0% and trimmed its marginal lending rate to 0.75%. ECB President, Mario Draghi and the ECB only have one rate cut left in its bazooka. However with inflation running at just 0.7% - the lowest level since November 2009, it is clear that the ECB is concerned about deflation.
The ECB chief once again pledged to keep interest rates low for an “extended period” but with only one shot left before interest rates reach 0%, other tools such as quantitative easing may have to be introduced.
BOE in no hurry
The BoE refrained from joining the ECB and left its interest rate on hold at 0.5%. Whilst this was widely anticipated, the focus will turn to the release of the economic projections due for release from the BoE this week. Recent economic data from the UK has been positive and this is seen in the +27bp rise in the 10 year gilt since 1 July 2013.
New Zealand’s unemployment rate fell from 6.4% to 6.2% for the September quarter as the participation rate climbed to 68.6%. The increase in employment however has not led to a rise in wages with wage price inflation easing back to 1.6%, from 1.9% in the pcp.
Overall New Zealand rate pretty well, even compared to the much publicised US unemployment rate, which was reported last week at 7.3%. There is nothing in the numbers to concern the RBNZ who believe the economy is trucking along at around a 3% annual growth rate.
One of the key figures due out this week will be the REINZ house price data for October which will illustrate the first month of loan-to-value restrictions. All anecdotal evidence points to the LVR’s having an impact but it will require a few more months of actually concrete data before the RBNZ can call it a success.
Banks are still competing hard for home loan business with giveaways and special rates still commonplace, however these are now reserved for borrowers with +20% deposits. As banks release their respective quarterly general disclosure documents for the period ending 30 September 2013, it will be interesting to see who adjusted their lending criteria prior to being warned that the LVR restrictions would come into force.
Corporate / Credit news
AMP announced an offer of unsecured, subordinated tier two capital notes. AMP is looking to raise at least A$300m through the issue of the floating rate note that will have a maturity of 18 December 2023, however AMP does have the ability to call at the five year mark. The margin is expected to be in the range of 2.65% to 2.85% and holders of the existing AQNHA.ASX have an opportunity to reinvest. The notes are loss absorbing via a conversion to shares mechanism now required under Basel III. AMP stated that it would redeem the New Zealand version of the notes on its first call date being 15 May 2014.
ASB released its general disclosure statement for the three months to 30 September 2013. ASB’s net profit after tax increased by +15.3% versus the pcp as it grew its loan book by +8.7% and deposits by +7.8% versus the pcp. ASB continued to maintain an excellent cost to income ratio (a measure of efficiency) of just 39%.
ASB Capital will reset the dividend on its perpetual preference share, ASBPA, on 15 November at 1.30% over the prevailing one-year swap rate. If set today the new dividend for the following year would be ~4.30%.
Auckland Council (AKC) successfully raised NZ$250m via a wholesale floating rate note. The FRN was priced at a margin of 47bp over the 90 day bank bill rate and will mature in March 2017.
Following a Commerce Commission report, both S&P and Moody’s Investor Service placed their respective outlooks for Chorus (CNU.NZ) on review for a possible downgrade.
GMT Bond Issuer Limited (Goodman Property Trust) announced it is considering making an offer of up to NZ$75m (plus up to NZ$25m in oversubscriptions) of secured, unsubordinated bonds to retail investors. The bonds will mature on 4 December 2020 and will be guaranteed by GMT.
The New Zealand Debt Management Office (DMO) issued another NZ$200m of inflation-indexed bonds. The bonds, due in 2025, received over NZ$600m of bids which resulted in a coverage ratio of 3.01x.
The NZX released its monthly October operating metrics with further declines in the NZDX. Listed debt securities stand at 86, which is -13.1% lower than the pcp with total trades falling by -6.1% and the value of those trades falling -7.1%.
Fitch Ratings assigned a BBB- credit rating to Heartland bank. Fitch also rated the banks’ outlook as Stable as opposed to S&P’s outlook of “Developing”.
Infratil will reset the coupon on its perpetual infrastructure bond, IFTHA, on 15 November at 1.50% over the prevailing one-year swap rate. If set today the new coupon for the following year would be ~4.50%.
The Local Government Funding Agency (LGFA) held tender number 16 last week with NZ$115m of bonds across four different maturities up for grabs. All of the tranches received solid demand with the NZ$25m of 2019’s being in particular demand. The LGFA received NZ$246m of bids for just NZ$25m of bonds.
Rabobank had its credit rating outlook lowered from Stable to Negative by S&P in wake of the LIBOR scandal which saw Rabobank pay a fine in the order of €774m. S&P said they had always held the prudent strategy and stable management of Rabobank in high regard, however the nature of the misconduct had led to the downgrade.
Trustpower (TPW) produced an expected weak 1H14 result with EBITDAF falling -7.8% to NZ$153.2m. The weakness was primarily down to falling retail sales and low generating volumes. On a more pleasing note, TPW’s large Snowtown II project is ahead of schedule and on budget. Net debt to net debt plus equity increased to 40% as net debt to EBITDAF also increased to 3.7x. Gearing and debt levels are expected to rise until the completion of Snowtown II.
Z Energy (ZEL) announced its first half results and the first as a publicly listed company. ZEL produced an EBITDAF result of NZ$107m on the back of -4% fall in volume but an increase in gross fuel margins. The net debt figure of NZ$439m constituted NZ$430m of bonds, NZ$30m drawn on its working capital facility offset by NZ$21m cash on hand. The bond covenant of 2.2x is well within the limit of 3.0x.
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