Last week marked a busy period for financial markets. As we rounded out the final week of reporting season, there were a number of key events that kept markets on their toes. Trump’s much anticipated speech to US Congress revealed minimal detail into how key policy promises would be implemented and more importantly, how they will be funded. Nonetheless, markets reacted positively with the S&P500 gaining while the US 10-Year treasury yield sold off by ~0.15% over the week. The hybrid market was busy last week with Challenger announcing a completed bookbuild for Challenger Capital Notes 2 (Prospective ASX Code: CGFPB). As expected, this new security was met with heightened demand and consequently, management increased the offer size to $450 million (previously $350 million) and set the margin at 4.40%. Earlier in the week CBA announced detail on the PERLS IX (ASX: CBAPF) bookbuild with the margin set at the lower end of guidance (3.90% over the 90-Day BBSW) and the deal upsizing to $1.45 billion (from $750 million). Interestingly, demand for Australian hybrid securities is even stronger in foreign markets with Bloomberg reporting bids for Macquarie Bank’s recently issued AT1 US dollar hybrid reached 16 times the original US$750 million offered to investors. We continue to reiterate our view that tight supply dynamics against the backdrop of benign economic and corporate fundamentals is resulting in spreads tightening across the risk spectrum. This imbalance is likely to continue into the near future without any catalyst for change. Staying on hybrids, this morning Crown released a market update regarding the on-market buy-back of the Crown Subordinated Notes I (ASX: CWNHA). When the group reported its half year results, we acknowledged the prospectus wouldn’t allow this action prior to September 2017 but since then Crown has amended the Terms of Issue. While a positive outcome for noteholders (considering the notes were trading as low as ~$81 in February 2016), we are beginning the question the validity of security documentation and shortcomings regarding retail investor protection. This was also demonstrated a few years back when Origin Energy simply amended and abolished 1 of 2 of its Subordinated Note (ASX: ORGHA) interest deferral covenants without any noteholder consultation.

Chart 1: Bloomberg AUSBond Composite Index (Monthly) Chart 2: Bonds vs Equities 2016/2017 (Monthly) Chart 3: Term Deposit Review – January

Interest Rates Interest rate futures markets are now pricing in a 94% probability of a US rate hike at the Federal Reserve’s March meeting. The US jobs report this Friday is the only obstacle standing in the way with the Fed effectively in blackout zone until then which limits the extent to which FOMC participants and staff can speak publicly. Domestically, Australia’s GDP figures released last Wednesday showed a strong rebound in the economy growing by 1.1% in the final quarter of 2016 (after contracting 0.5% in the third quarter) bringing the GDP annual growth rate to 2.4% (versus expectations of 2.0%). While this comes as relief for the government, the result was heavily driven by mining and commodities exports and highlights Australia’s economic trajectory remains fragile. On 3 March 2017, the ASX 30 Day Interbank Cash Rate Futures March 2017 contract was trading at 98.505 indicating a 5% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (unchanged on the week prior).