Australian Bond Exchange


Credit updates:

• Dicker data (DDR) released their annual results with revenues increasing ahead of guidance, and a reduction in
working capital and debt requirements,
• Next DC (NXT): Announced the successful results of their Share Purchase Plan, raising $80.4m, and
• Sydney Airport (SYD) updated their monthly traffic updates with resilient growth reported especially to/from
mainland China (+5.5% y/y). JP Morgan released a note confirming SYD as their preferred pick in the infrastructure

Macro comment:

The following factors were impacting bond pricing this week:

  • Benchmark US 10yr treasury yields are 3bps lower than a week ago at 3.06%, with a near term range of 3-3.10%
  • Nerves surrounding the formation of the Italian government and the possibility of a referendum to leave the
    single currency kept markets in a cautious posture this week, leading to general declines in European bank share
    prices. Headlines regarding the possible cancelling of the North Korean summit also added to the caution,
  • Emerging markets remain under pressure with extreme currency moves still making headlines almost daily, and
  • The net result of these developments has been an increased appetite for fixed income with rising bond prices
    seen over the past week.

These macro developments have three main implications for investors:

  • Inflation: Commodity price rises are still evident, as they were last week with the oil price moving even higher.
    Meanwhile, Chinese- US trade tensions are also continuing, meaning that the transmission of inflation to the CPI
    will escalate if trade is reduced, as a result of trade tensions. In turn, reduced trade, meaning a lower quantity of
    lower priced Chinese imports, will have a global inflationary implication; one that needs to be adequately
    considered. Having inflation protection in place, through inflation linked bonds, will assist in dampening the
    impact of inflation on investors, and good portfolio construction necessitates attention to such risk, and the
    Sydney Airport 2030 CPI linked bond would be appropriate for this purpose,
  • Growth: Since the start of the year, ongoing concerns with European banks have re-emerged. Typically, when the
    price of banks decline, the financial markets become concerned about future growth prospects and deflation in
    Europe. As indicated previously, these concerns are coming at a time when the US business cycle is already very
    developed and mature. If the financial markets continue to develop the theme that it has begun to consider,
    namely anticipating the end of the growth cycle, then equities will soon decline in price. Good portfolio
    construction necessitates paying attention to these risks. Specifically, longer dated fixed rate bonds would assist
    with this diversification more than shorter dated bonds, Centuria and Asciano fixed rate bond would be
    appropriate for this purpose, and
  • Interest rates: Ten-year US treasuries have been testing support at 3%, as shown in Figure 1, and the RBA has
    indicated that rates should be on hold locally for some time to come. In order to improve returns in this
    environment, where domestic interest rates are not changing, the Dicker Data floating rate bond is appropriate