It has been a relatively uneventful week in the global markets. On the home front, the situation in Victoria is improving however, it is still a long way from some form of normality and the state continues to be in lock down. It is a tough situation and a very fine line balancing health vs the economy? At this stage, boarder closures seem to be the mainstay approach of the state’s premiers with the hope to avoid a second wave. That said we continue to be surprised by the performance of financial markets across the globe, with equity markets pushing higher and corporate bond yields falling, ignoring any bad news. The talk of a possible vaccine for COVID by the end of the year is giving hope that we may reach some form of a final stage of this crisis.
Government bond yields on the other hand are not reflecting the more positive mood in the financial markets and our 10y benchmark yield continues to trade in a range between 0.85% to 0.95% currently sitting at 0.94%. This range trade has been going on for the past 4 months and governments around the world continue to issue enormous amount of new bonds to finance the massive fiscal stimulus. Just recently the AOFM announced the issue by syndication of a new 1.00% November 2031 Treasury Bond. The issue will be of a benchmark size and the initial price guidance for the issue is a spread of 8 to 11 basis points over the implied bid yield for the primary ten-year Treasury Bond futures contract. The chart below shows a history of Australian bond and inflation rates since 1870.
On some corporate news – it was a tough week for Virgin bondholders. Bain’s $3.5b deal means creditors are likely to receive just 9-13c in the dollar which differs wildly from the 67c thrown around by the bondholder consortium. Deloitte said Bain’s “total commitment” to Virgin was $3.5 billion. That includes paying employee entitlements in full, honouring customer travel credits, taking on a “significant portion” of secured debts and aircraft leases, and paying a return to unsecured creditors. Deloitte did not provide a breakdown for the $3.5 billion figure. The distribution to unsecured creditors – which includes landlords, trade creditors and 6,500 bondholders – will be between $462 million and $613 million, according to Deloitte’s final creditors’ report released on Tuesday. Those returns hinge on creditors voting in favour of a deed of company arrangement (DOCA) at the second creditors’ meeting on September 4 to finalise the sale to Bain. If that vote fails, Bain will acquire Virgin through an asset sale which will see unsecured creditors receive between 4 and 7c.and 7¢ in the dollar, the report says.