The debt and hybrid market has picked up steam over the past few weeks in terms of deal flow with Bank of Queensland, Australian Natural Proteins, Heritage Bank and SCT Transport all coming to market (note that these securities were all offered to wholesale investors only). But the US and European wholesale markets continue to be preferred options for borrowers of senior debt as price and term options continue to be more favourable. With 13 days to go until the end of financial year we thought the primary market (new issues) would slow down as investors focus on capital gains / losses on share portfolios rather than income securities. But who knows, we could see more issuance in the weeks ahead. The Aussie dollar remains fairly volatile (it reached just over 81.5c earlier this month before falling back to 0.76c) as foreign policies and uncertainty in the domestic economic environment prevail. The RBA left rates unchanged earlier this month but they continue to threaten further rate cuts as jawboning of the currency seems to be losing its steam. GDP and employment data was also strong this month which has created more uncertainty surrounding the future direction of domestic interest rates – but futures markets are suggesting not cut next month at this stage. Internationally, the focus is on Greek debt issues as no new progress was made between the Greek government and its creditors, raising fears of a potential default early next month.
The domestic yield curve remains in flux with a number of structural factors in the market suggesting a bull market for the US Dollar over the next few years and potentially a lifting in the Fed Funds Rate later this year. This cash rate “normalisation” is possible in the short term but will create economic headwinds for the US especially as the rest of the developed world will be continuing QE and/or ultra-low cash rate policies. The negative US GDP data a few weeks back was widely expected by the market but in our opinion provided the employment and inflation figures continue on their current trajectory the US yield curve will continue on its volatile “normalisation” path. This is broadly negative for global fixed rate bond markets and hence why we continue to recommend short duration or floating rate instruments.
In other news the CEO of the Australian Securities Exchange came out last week questioning the lack of action from the government in reforming the domestic corporate bond market. “Corporate bonds continue to be one of our biggest frustrations,” and “I have been talking about it for four years now. We are big fans of the Murray recommendation – it is not particularly innovative, because it is a well-trodden path in countries like Singapore, NZ and the UK, so we should simply get on with and implement the recommendations and I for the life of me can’t understand why it hasn’t been done.” This is not news and we hope that reform is on the way . Given the amount of issues confronting parliament at present and the lack of interest to date we are not holding our breath.
