21st November 2018
Share market continue its downturn this week as the market clearly signalled a risk-off sentiment. The biggest news is continuing Brexit speed bumps and US and China trade war.
The Brexit story keeps on giving but the show must go on. The Cabinet finally gave the Prime Minster Theresa May’s draft withdrawal agreement the collective approval, but we think that the battle is far from over. A string of resignations including two from her own Cabinet is further destabilising the situation. The forty-year-old relationship was never going to be easy to unwind and only time will tell how it will play out. The President of the European Council Donald Tusk hit the nail on the head by saying “Since the very beginning, we have had no doubt that Brexit is a lose-lose situation and our negotiations are only about damage control.” So it was no surprise for the European Government bond market and bond yields generally react more to the global stock market sell-off with the “risk off” trade being the dominant factor.
Brewin with Nguyen
A client of mine had a very good question about the senior bonds they are investing in. Why are they called senior bonds?
The short answer is because companies can also issue subordinated bonds which rank lower than the senior bonds.
And almost every time the follow up question is what do you mean by rank?
Every company follows the same capital structure in terms of ranking. I added a chart to illustrate the pecking order in the case the company has a credit event. Meaning the Senior bondholders get paid first, then subordinated bondholders and flows down like that. To put it in perspective the Australian government bonds are also senior bonds.
In terms of investing in a company the senior bonds are the safest.
Please see link for full document: ABX weekly 21/11/2018