In a week filled with uncertainty the bond market outperformed with treasuries rallying across the curve. In Australia the Credit Indices outperformed equities (slightly) as Telstra (announcement from the ACCC), BHP (completion of huge Hybrid issue), Origin Energy (WTI Oil dropped ~8% from its recent high) and Westpac announced its $3.5billion capital raising. New issuance was again limited to a single deal with Suncorp’s $750 million, 5-year, dual tranche (fixed at 3.50%, floating at 3M BBSW + 1.25%), senior unsecured transaction in the over the counter market. However, the big news of the past week was BHP finally pulling the trigger on its 5-part multi-currency hybrid (unfortunately none in Australian dollars). BHP said they will use funds for general corporate purposes and likely to include debt repayments. According to Bloomberg they have $33b bonds outstanding of which $2.6b is maturing in both 2016 and 2017. This will definitely alleviate any pressure on the credit rating and will “create additional flexibility for our balance sheet” during a period of low commodity prices. Each tranche (USD, GBP, EUR) was priced at a fixed yield of between 4.75 – 6.50% over the relevant swap rate. As the global economy struggles with top line (revenue) growth we are starting to see huge mergers, acquisitions and/or asset sales. In the past few weeks Dell agreed to buy data-storage company EMC for $67 billion in the largest-ever technology industry takeover, AB InBev agreed to buy SABMiller (the merged company would account for one-third of all global beer sales) and Wells Fargo agreed to buy GE Capital unit for $32 billion. These are enormous deals and in our opinion are a sign of things to come. Reporting season in the US continues this week with 118 companies to report while in Europe approximately 60 companies will do the same. In Australia the resource companies will announce production results and the next week bank results are due. Interest Rates Last week’s domestic employment data was ugly (Source: Australian Bureau of Statistics) with the market losing 5,100 jobs (expectation to add 9500) in September and more importantly the number of full time employees dropping sharply. This was mostly ignored by the market due to the strong growth in employment numbers over the past few months. The more important issue for the Reserve Bank is what to do if all the banks follow the lead of Westpac and begin raising their rates independently of the official cash rate. The moves by APRA to enforce stricter capital requirements have caused Westpac to increase its variable mortgage rates next month by 0.2% to partially mitigate the lower return on equity expected. In February the 10-year bond yield hit an all-time low of 2.27% before lifting to highs near 3.15% on June 11. We are now back around 2.58%. 3-year bonds are currently testing the lower limit of the recent yield range of between 1.80 – 2.0% range (1.81% at the time of writing). At 16 October 2015, the ASX 30 Day Interbank Cash Rate Futures November 2015 contract was trading at 98.10, indicating a 44% expectation of an interest rate decrease to 1.75% at the next RBA Board meeting (this has progressively increased from ~24% over the past week).
