Last week equity markets rallied and bonds fell as the domestic 10-Year Futures yield increased from 2.64% to 2.73% before falling back to 2.65% this morning. US equities again moved to record highs but new issuance in the credit market was limited due to thanksgiving holiday in the US. We have moved back to macro-policies defining outcomes for bond investors. This is evident in the gap between US and German government bond yields reaching a 27-year high last week. The market perceives a more robust recovery in growth or inflation in the US while Europe is looking down the barrel of its own political uncertainty. The key difference here is that Trump is likely to significantly change the makeup of the Federal Open Market Committee (FOMC) members during his first 18 months (to reflect a pro-growth agenda) while Europe is facing significant headwinds including how to deal with a potentially insolvent Italian Banking system. Last week’s primary market focus was the IAG Capital Notes (Prospective ASX Code: IAGPD). The investor bid was very strong with reports that the issuer received bids in excess of $1.0 billion (or ~3.3x the indicated deal size) which suggests that bids from the broker firm offer were scaled back. This strong bid was also driven by last weeks redemption of Woolworths Notes II (meaning there is a significant amount of money looking for a home). This supports our thesis of a strong bid tone to the ASX Debt & Hybrid market over coming months (note that the $900 million Origin Subordinated Notes will also be redeemed in December 2016). Last week we listened to two very different Annual General Meetings for high yield issuers. At the NEXTDC (ASX: NXT) AGM, management revealed a strong start the year and are expecting revenue growth of 24 – 31% for FY17. Dynamics for the data centre industry remain strong which is reflective of the company’s roll-out of new capacity. However, the new CEO of Capitol Health (2-weeks into job) spent his time defending the company and announcing a “review” of non-core investments to reduce debt. The volume weakness in the radiology industry continues and we are watching the data carefully.

Click below for Charts Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2015/2016 (Monthly) Chart 3: Term Deposit Review – October