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The following is a summary of the key events impacting fixed income markets over the past week.
The two main events that will have the attention of the market this week will be the Reserve Bank of Australia’s monthly policy meeting and the US non-farm payrolls data due on Friday night. A plethora of data will be released this week in the US, however none more important than the employment data.
Bonds and equities both struggle in November
The only place to hide in November seemed to be in cash with both bonds and equities producing negative returns. According to the NZX, investment grade bonds fell by -0.46% over the month, performing better than New Zealand Government bonds which fell by -0.78%. Despite all the hype surrounding the equity market, the NZX 50G Index also had a negative return for November, down -2.3%.
Over the longer term, bonds still provide excellent returns when compared to the much more volatile, lower ranking and regulatory impacted equity market. Over five-years investors in A Grade corporate bonds have enjoyed a 6.77% return compared to a 12.1% return for the NZX 50G Index. The performance over 10-years is much more even with return on bonds of 6.86% versus equities of 8.8%.
LVR’s starting to show up in the data?
The Reserve Bank of New Zealand (RBNZ) released its first full month of high loan-to-value statistics last week. Early indications appear to be encouraging for the RBNZ with high LVR lending (excluding exemptions) falling to 11.7% of total new mortgage lending, down from 25.5% in September.
The RBNZ will need a few months of this type of consistent data for the policy to be deemed a success but this along with anecdotal evidence suggest the policy is having the desired effect. If only there was a policy to lower the exchange rate!
US unemployment back on the radar
The world’s largest economy is expected to have added 180,000 jobs in November which in turn is expected to see the unemployment rate fall from 7.3% to 7.2%. Whilst this is still a long way from the Fed’s desired 6.5% level, the US is still at least creating jobs. Overall the economic data out of the US remains very mixed and until the economy gets its ‘ducks in a row’, it appears the Fed will remain on the front foot in regards to its monetary policy.
No change for the RBA?
The RBA heads into its last policy meeting for 2013 this week with no-one expecting an interest rate cut. The jury about whether further rate cuts are needed is still out with economists pretty evenly split 50/50 for the RBA to reduce its cash rate from 2.50% in 2014.
The RBA will welcome the easing Australian Dollar which has weakened by around 6c versus the USD since 25 October.
BoE worried about a property bubble as well
The Bank of England (BoE) withdrew its support package for mortgage lending, warning that rising house prices could derail the economic recovery. ‘Cheap money’ has led to housing boom and BoE Governor, Mark Carney said “it was no longer appropriate to have our foot on the accelerator”.
Spreads continue to tighten
As illustrated in the charts below, credit spreads continue to narrow as the solid economic data continues for New Zealand. With underlying swap rates rising (5-year swap rate up +143bp year-to-date) and credit spreads tightening, the overall yield on many fixed interest securities remains relatively flat.
The narrowing of credit spreads is across the board and not isolated to any particular credit rating group. This can be somewhat explained in New Zealand due to the high concentration of energy companies, many of which are state owned or partially state owned, in the BBB space. This BBB space tends to trade a lot tighter than what normal BBB’s might trade at. Two of New Zealand’s ‘blue chip’ companies, Fonterra (FCG) and Auckland International Airport (AIA) have seen credit spreads tighten by around 50bp year-to-date, 5bp to 10bp in November alone. This is despite Fonterra having a disastrous year with its botulism scare and a number of significant profit downgrades.
The major banks have also followed suit despite a number of regulatory headwinds. These headwinds are set to continue in 2014 with further capital required next year in the form of the introduction of the Capital Conservation buffer.
It is also likely that further macro-prudential tools will be introduced along with increases to the Official Cash Rate (OCR). Rises in the OCR are likely to lead to a shift from floating to fixed for borrowers which impacts the profitability of banks.
In summary credit spreads are likely to remain suppressed for some-time as economic conditions look set to improve and issuance remains light.
Corporate / Credit News
ASB issued a three-year floating rate note at +65bp over the 90 day bank bill rate. The NZ$320m issue will mature in December 2016.
Auckland International Airport (AIA) announced it is proposing to return NZ$454m of capital to its shareholders. AIA intends to undertake a 1:10 share cancellation and a payment of NZ$3.43 for each share cancelled. The capital return is predominately funded by new debt with AIA believing it has flexibility in its balance sheet and credit rating to increase its debt levels.
The Debt Management Office (DMO) received NZ$663m of bids for NZ$200m of April 2020 New Zealand Government Bonds. The bonds were sold at an average yield of 4.55%.
Mighty River Power (MRP) announced that S&P’s revised global ratings criteria and methodology will have no impact on its current BBB+/stable credit rating.
New Zealand’s terms of trade rose by +7.5% in the September quarter to its highest level since 1973. The rise comes on the back of soaring dairy prices which contributed to a +8.9% rise in export prices.
Tower (TWR) reported a FY13 profit of NZ$34.4m which included NZ$14.7m of abnormals. TWR’s main business, General Insurance, performed in line with expectation with Net earned premiums increasing +10.9% to NZ$219.3m. Currently TWR has NZ$45.9m of surplus capital over its RBNZ minimums.
Transpower (TRP) issued a further NZ$200m to its NZDX listed (TRP010) bond with the issue yield of 5.337%, higher than the 5.14% coupon.
UDC announced an increase in its NPAT of +13% to NZ$43m for the 12 months to 30 September 2013. UDC’s loan book of NZ$2.07bn found growth in the agriculture, fishing and forestry sectors. UDC also improved its capital ratio from 15.3% to 17.1%.
Vector (VCT) announced that its credit rating was impacted by S&P’s revised global ratings criteria and methodology. VCT’s credit outlook was lowered to negative due to S&P viewing the regulatory regime in New Zealand as high risk.
Westpac (WBC - New Zealand) released its general disclosure statement for the year ended 30 September 2013. NPAT increased by +16.6% to NZ$711m versus the pcp as WBC grew its loan book by +3.6% and deposit book by +11%. Capital levels remain strong with a total capital ratio of 12.3%.
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