FIIG - The Fixed Income Experts

News and Education

Fixed income market monthly update

by William Arnold | May 22, 2013

Australian iTraxx

The Australian iTraxx Credit Default Swap (CDS) index tracks the performance of Australian corporates and is an indicator of credit risk for investment grade entities. The lower the spread, the lower the perception of credit risk. The charts below show performance over one month and one year. Over the last month, the Australian iTraxx tightened some 15 bps and over the last 12 months has tightened just under 100 bps.

Bond market in review

The RBA joined seven other central banks in easing policy this month. The RBA cut the cash rate by 0.25% to 2.75%, revising inflation forecasts lower and increasing the scope to cut rates again in the future.

Headline Consumer Price Index (CPI) grew by 0.4% in the first quarter, falling short of market expectations which centred on a rise of 0.7%, with annual CPI growth now standing at 2.5%.

Given favourable market conditions, issuance activity in the debt capital market continued at a steady pace this month. So far in May total issuance volume has been $8.6bn, the second highest year to date behind the $12.62bn of issuance undertaken in January.

In the US, the Federal Open Market Committee announcement that quantitative easing is to continue at current levels boosted debt markets, while the ECB decision to cut the refinance rate by 25bps to 0.5% continued to push yields lower. The ECB's Joerg Asmussen told journalists in Berlin the bank's monetary policy would remain expansive for as long as needed. Benoit Coeure made similar comments when speaking at a conference in Orleans in France, saying the ECB was committed to providing the euro zone with abundant liquidity for as long as necessary.

Credit spreads

The data in the chart below is taken from Bloomberg Fair Market Curves. The credit spreads (over the applicable swap curve) are based on a five year maturity representing the composite credit spread of securities around that maturity for each ratings band.

Spreads at 15 May 2013:

AAA: -52.05

AA: +88.88

A: +123.57

BBB: +206.97

Significant ratings/credit changes over the month

  • Moody’s and S&P commented that Australia's Aaa/AAA/Stable sovereign rating was unaffected by the government’s budget. The federal government plans to return its budget to surplus over a longer period than previously anticipated, largely due to downward revisions to revenue projections. S&P said that Australia's credit metrics remain supportive of the 'AAA' sovereign rating despite the revised budgetary projections. Moody's noted that the federal gross debt to GDP will peak at 20.6% in FY15 and that general government debt to GDP will reach about half the 50% median government debt to GDP of the 14 sovereigns rated Aaa by the agency. S&P said the fiscal position remains a key rating strength but reiterated that they could lower the ratings if external imbalances were to grow more than they currently expect.
  • Moody's affirmed China's rating of Aa3 but changed its outlook from positive to stable. The rating agency wrote that progress in increasing the transparency of local government debt and reducing credit growth were less than anticipated.
  • Fitch downgraded the UK's rating to AA+ from AAA citing increasing levels of government debt at a time when the outlook for growth is deteriorating. The rating outlook is stable. Fitch said the U.K.'s budget deficit remains at 7.4% of GDP and isn't expected to fall below 6% of GDP, or £100 billion, until the end of the current Parliament term. Moody's and S&P rate the UK at Aa1/stable and AAA/negative respectively.
  • QBE Lenders Mortgage Insurance is not affected by a credit rating downgrade of its parent, QBE Insurance Group, by Moody's Investors Service. Moody's cut the issuer rating and senior unsecured debt ratings for QBE to Baa1, from A3. It cut the subordinated debt rating to Baa2, from Baa1.