October 17, the date at which the US will apparently be down to its last US$30bn

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The following is a summary of the key events impacting fixed income markets over the past week.

The week ahead is most likely to be a repeat of last week with the markets dominated (and rightly so) on the US and its possible default. While US politicians play chicken, the world awaits a decision that is of significant importance to the global recovery.

However, it’s not all about the US

This week in little ole’ New Zealand there is some data which is of significance to our economy and possibly the level of interest rates. On Wednesday, the September Consumer Price Index (CPI) data is released, which by all accounts is expected to see annual inflation back within the Reserve Bank of New Zealand’s (RBNZ) 1% to 3% target band.

Annual inflation has been outside of the band since June 2012, however the 5% rise in fuel costs over the three months to 30 September is expected push the CPI higher. It will also confirm the forecasts of the RBNZ, that medium term inflation will (is) heading back to the mid-point of the target range.

Corporate Bond Index yield rises

The yield on the ANZ Investment Grade Bond Index rose +7bp over the course of last week to start the week off at 5.00%. The yield is now +14bp higher since the beginning of October. The duration of the Index remains short at 2.71yrs.

Important date(s)

The key date this week is no doubt 17 October. This is the date that Treasury Secretary Jack Lew warned could bring a US default. Once we get past 17 October, the US will apparently be down to its last ~US$30bn, which would mean it would start missing key payments in the week 22 October and 31 October.

Data releases still rare in the US

The most significant economic release from the US this week is the Fed’s Beige Book. With most of the economic data suffering from the partial US government shutdown, the Beige book is one of the few pieces of economic data that the market can digest ahead of the Fed’s 31 October central bank meeting.

Japan, China and the IMF give US the message

Everyone who is everyone and those who actually pay the bills of the US, Japan and China have had their say on the US and its ‘stalemate’. Japan and China hold US$1.14 trillion and US$1.28 trillion of US treasuries respectively and are obviously keeping a close eye on proceedings. Japan are diplomatic as usual, however China didn’t miss a chance to state that it was a good time to “start considering building a de-Americanised world”, with an alternative reserve currency.

European banks to get a thorough check up

The European Central Bank (ECB) is taking over the supervision of Europe’s lenders from 2014 but is changing the way the stress tests are done. Going forward, under the ECB, any number provided by the banks during a stress test will be checked three times. The first check will be completed by the national supervisor, the second check will be done at the European supervisor level with the third and final check coming from an independent auditor.

A whole lot of ‘noise’  

Despite all of the ‘noise’ around the market at present, interest rates (New Zealand swap rates and US treasuries) have remained relatively stable. It is quite remarkable when you consider the inconceivable prospect of a US default approaching fast (possible October 17), let alone increasing an already outrageously high debt ceiling of US$16 trillion!! 

This is no more evident than the behaviour of the US bond market during the debt ceiling/US shutdown saga. The benchmark US 10 year treasury bond yield gained +6bp last week, hardly a reaction one would expect from the bond market facing the dire consequences of a default. 

If we compare this to the equity markets where the hint of a ‘deal’ being struck provided the Dow Jones Index (DJI) had its biggest rally since December 2011, up 323pts. It does seem odd that the news that the US will increase its debt beyond US$16 trillion is seen as a positive and is the catalyst for a buy up on Wall Street. Both the DJI and the broader S&P500 are now at levels when the government began its shutdown on 1 October.

Although it seems inevitable that a solution will be found between the Republicans and Democrats, the lack of volatility in the bond market is a touch surprising. It could be the fact that the US has raised the debt ceiling more than 70 times previously! Although they seem to be cutting it a bit fine this time around.

Locally, we have seen swap rates at the long end of the curve slowly edge higher in October. The 10-year swap rate is +22bp higher since 1 October with the shorter-end, the 2-year swap rate rising +10bp. This rise has seen the curve steepen once more to within 3bp of its steepest point of 2013 (160bp). 

The US 10 year bond has rallied back to start the week off at 2.68%. After briefly touching 3.00% at the beginning of September, the on-going issues in the US have slowly seen the benchmark bond drift lower, producing a trading range of 39bp over the last two months.

Our view remains that the New Zealand yield curve will eventually flatten as the RBNZ looks to raise the Official Cash Rate in 2014, and hence bond investors must maintain caution when investing too far out on the curve as the reward for doing so will diminish.

Corporate / Credit news

Contact Energy (CEN010) announced its intends to buy-back some of its bonds that mature in May 2014. The CEN010’s currently pay a coupon of 8.00%, however with CEN already pre-funding a considerable amount of the NZ$550m maturing, CEN appear to be seeking to reduce the size of refinancing risk in May 2014.

Mighty River Power (MRP) announced that it will begin an on-market share buyback programme to purchase up to NZ$50m worth of shares as part of its capital management plans. MRP believe that the buyback, representing less than 2% of MRP’s shares, was a prudent use of capital. The purchase of up to 25 million ordinary shares may occur from 15 October 2013 and may continue until 14 October 2014.

Origin Energy will reset the dividend on its perpetual preference shares, OCFHA on 17 October at 1.50% over the prevailing one-year swap rate. The dividend through to 17 October 2014 would be around 4.48% if set today.

Rabobank Nederland reset the coupon on its perpetual capital security, RBOHA. The coupon through to 8 October 2014 is 3.7075%.

SKY Network Television reset the coupon on its annual resetting senior bond, SKTFA. The new coupon through to 16 October 2014 is 3.62%.

Wellington International Airport (WIA) announced an offer of NZ$50m (plus the ability to accept oversubscriptions of NZ$25m) of unsecured, senior bonds. The bonds have a maturity of May 2021 (7.5yrs) and will pay a coupon of 6.25%. WIA is currently rate BBB+ (positive) from S&P.

Westpac (Australia) acquired Capital Finance Australia and BOS International Australia for A$1.45bn. The transaction comprises of a A$3.9bn motor vehicle finance book, a A$2.9bn equipment finance book and a A$1.6bn corporate loan portfolio. The acquisition is expected to deliver A$100m in cash earnings in FY15.

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