Content supplied by Forsyth Barr
The following is a summary of the key events impacting fixed income markets over the past week.
Even though it is a short week in New Zealand there is plenty to keep the market on its toes. The week will no doubt be defined by what occurs on Thursday as the Fed concludes its two-day policy meeting followed by the RBNZ’s OCR review (9.00am NZT).
RBNZ OCR review
Although the Reserve Bank of New Zealand (RBNZ) will no doubt touch on some of its concerns at the Official Cash Rate review on Thursday morning, it may also look to tone down some of the aggressive commentary that has been a feature of the RBNZ in recent times. As the RBNZ has previously stated (and hence the introduction of macro-prudential tools), there is concern regarding the impact on the NZD if the RBNZ were to raise the OCR. While there is not much the RBNZ can do about USD weakness, there seems little point in exacerbating the issue with higher interest rates.
The loan-to-value restrictions may well buy the RBNZ some much needed time and the market are beginning to feel that way as they shift out from March 2014 to April 2014 for the first rise in the OCR.
We would expect inflation (now back within the target band) and the NZD (recently at 0.85 USD) to feature in the brief commentary. Some observations that may be considered since the last time the RBNZ delivered its last OCR review on 12 September are:
- Annual inflation now running at 1.4% after a 0.9% rise in the September quarter
- NZD is flat on a TWI basis but up +2% versus the USD
- Impact of the loan-to-value restrictions not fully known yet
- Further macro-prudential tools left in the tool-box
Yield curve flattening
While the OCR reviews often only provide a brief commentary of around 300 words we would expect some commentary on inflation and its expected path forward. Given past comments around the Christchurch rebuild it seems unlikely that the RBNZ’s view would have changed too much, even after the recent September figures.
However, the NZD won’t get off as lightly as we would expect another tongue lashing and the concerns the RBNZ hold given its continued strength. There seems little the RBNZ can do about this though as witnessed by the TWI. All other currencies are strengthening against the USD, especially as ‘tapering’ looks to be on hold once again. The RBNZ is probably reasonably happy with the success of the loan-to-value restrictions so far.
Whilst there is little evidence it has or is working, the behaviour of the lenders (banks) has changed and this is a positive outcome. The current pricing for an interest rate rise in March 2014 has weakened with only 13bp now priced according to the overnight index swaps. April 2014 now seems favoured by the market, however with so many variables around, like the impact of the LVR restrictions, there may not be too much conviction behind market forecasts either.
The shape of the yield curve is however changing as the long-end eases back (-30bp lower over the last two months) and the short-end only falling -10bp. The steepness of the yield curve is now flatter than two months ago. Below in Figure 1, the changing shape of the yield curve is illustrated using the forward rates from Bloomberg. As we can see by 2017 (4-year), the yield curve is almost flat (based on today’s forward pricing).
Clarity needed from the Fed
US equity markets hit another record high at the close of play last week as the market expects the US Federal Reserve to clarify its position on the US economic recovery and its plans surrounding ‘tapering’. With the US economy struggling to gain momentum, much of the recent economic data is average at best and therefore many believe tapering is off the agenda for the time-being.
Instead of withdrawing stimulus and relying on the market to adjust accordingly to economic situations, the Fed continues to supply an addicted market. With no shortage of confusion surrounding some of the Fed’s more recent comments, it is hoped that the communication with the market is somewhat more accurate and informative this time around.
NZGB’s still in demand
The New Zealand Debt Management Office (DMO) received strong demand for its tender of NZ$200m of April 2020 NZGB’s. The bid-to-cover ratio was 6.5x with over NZ$1.3bn worth of bids received for the bonds which were sold at a weighted average yield of 4.3645%.
The 10-year NZGB fell -15bp over the course of last week with the 10-year swap rate falling -13bp.
US unemployment
The employment data for September was finally released last week after being delayed by the partial US government shut-down. The data was mixed with the monthly job growth of 148,000 failing to meet the 180,000 expected, however the overall jobless rate fell to 7.2% (from 7.3%).
Australia to issue less AGB’s
The Australian Office of Financial Management (AOFM) revised down its new issuance programme for 2013/2014. The AOFM expects to issue around A$70bn of Commonwealth government bonds, including A$47bn of new issuance, down from the A$50bn guidance given in May due to a A$8.8bn grant provided by the Reserve Bank of Australia (RBA).
Corporate / Credit news
ANZ (New Zealand) announced a +37% rise in cash profit for FY13. ANZ has 20% of its loan book in the >80% loan-to-value area with the overall LVR of the portfolio 47%.
APN News & Media (APN) announced it will sell the remaining 50% interest in APN Outdoor to Quadrant Private Equity for A$69m. APN sold the initial 50% stake to Quadrant in May 2012. The proceeds will primarily be used to repay debt.
Infratil (IFT) announced that it had entered into a conditional agreement to purchase 19.9% of aged care company Metlifecare for NZ$147.9m (NZ$3.53 per share). Metlifecare is listed on the NZX and ASX with the deal expected to be completed by 28 November 2013.
Infratil (IFT) also announced that it plans to commit A$100m to pursue greenfield availability based public-private partnership (PPP) in Australia via the Australia Social Infrastructure Partners platform. It is likely that IFT’s capital commitment will be called over the next two to three years.
NZ Post (NZP) reached an agreement with its owner, the NZ Government, to reduce urban deliveries to three days. A change to the 14 year old deed was needed due to letter volumes falling by 322m or 30% since 2006.
The NZX release its operating metrics for Q3 which clearly highlights the state of the NZDX. Total debt raised over the period to was NZ$0 with total trades falling -10.9% and the value of those trades -14.3%.
Port of Tauranga (POT) completed the issue of NZ$50m of senior, unsubordinated bonds. The bonds will mature in October 2019 and pay a fixed coupon of 5.865% equating to an issue margin of 133bp. The bonds were sold to wholesale investors and will not be listed on the NZDX.
TOWER Ltd (TWC) announced it will release its preliminary results for the year ended 30 September 2013 on 26 November. TWC also advised that it will release the details of its intended NZ$70m capital return. The bonds, TWC010, are not likely to be redeemed early now.
Wellington International Airport (WIA) successfully raised its NZ$50m through its senior bond issue. WIA announced it would accept oversubscriptions of up to NZ$25m. The offer is now only open to existing investors (WIA010).
---------------------------------------------------------------------------------------------------
Disclosures and Disclaimers:
Disclosure: The comments in this publication are for general information purposes only. This publication is not intended to constitute investment advice under the Securities Markets Act 1988. If you wish to receive specific investment advice, please contact your Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) may own or have an interest in securities or other products referred to in this publication, and may be directors or officers of, or provide investment banking services to, the issuer of those securities or products, and may receive fees for acting in any such capacity in relation to that issuer. Further, they may buy or sell securities as principal or agent, and as such may undertake transactions that are not consistent with any recommendations contained in this publication. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) confirms no inducement has been accepted from the researched/recommended entity, whether pecuniary or otherwise, in connection with making any recommendation contained in this publication or on our website.
Analyst Disclosure Statement: In preparing this publication the analyst(s) may or may not have a threshold interest in the securities mentioned in this publication. A threshold interest is defined as being a holder of more than $50,000 or 1% of the securities on issue, whichever is the lesser. In preparing this publication non-financial assistance may have been provided by the entity being researched. A disclosure statement is available on request and is free of charge.
Disclaimer: This publication has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. However, that information has not been independently verified or investigated by Forsyth Barr Limited. Accordingly, Forsyth Barr Limited: (a) does not make any representation or warranty (express or implied) that the information is accurate, complete or current; and (b) excludes and disclaims (to the maximum extent permitted by law) any liability for any loss which may be incurred by any person as a result of that information being inaccurate or incomplete in any way or for any reason. The information, analyses and recommendations contained in this publication are confidential to the intended recipients and are statements of opinion only. They have been prepared for general information purposes and whilst every care has been taken in their preparation, no warranty or representation is given (express or implied) as to their accuracy or completeness. Nothing in this publication should be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from doing so or engaging in any other transaction. This publication should not be used as a substitute for specific advice. This publication is intended to provide general securities advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore prior to acting on any information, analysis or recommendation contained in this publication, you should seek advice from your usual Investment Advisor. Forsyth Barr Limited and its related companies (and their respective officers, agents and employees) will not be liable for any loss whatsoever suffered by any person relying upon any such information, analysis or recommendation. This publication is not intended to be distributed or made available to any person in any jurisdiction where doing so would constitute a breach of any applicable laws or regulations.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.