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From the Trading Desk-New issues provide short term opportunities in other bonds

by Ryan Poth | Oct 15, 2013

From the Trading Desk

Regular readers will know, every week I try to preface my commentary with a couple of specific bonds that stand out for the week. Whenever we bring a new issue to market (last week we announced a new four year bond from PMP Finance Limited) there will usually be a range of bonds for which we see good supply as investors switch out of these bonds into the new issue.

So this week, rather than mention them in the preface, these will be highlighted in the main article below, and by the nature of the opportunity, there are going to be more than just a couple. Some of these are issues we see regularly, but others are rarer and only seen in these types of circumstances.

So please read on…

New issues provide short term opportunities in other bonds

For each new issue that FIIG brings to the market, some investors want to sell out of current holdings to fund their purchase of the new bond. As a result, a number of other bonds often become available at attractive levels.

Here are some of the stand-out bonds we are seeing, along with some of the bonds against which they look to be good relative value. Please note pricing is indicative and may change due to supply and market activity.

1. Downer 5.75% 29 Nov18 ($99.34 / YTM 5.90% / +199bps) – Wholesale only

2. Qantas Airways 6.50% 27 April 2020 ($101.32 / YTM 6.25% / +205bps) – Wholesale only

The Downer 2018 and Qantas 2020 are excellent reinvestment options for wholesale clients who hold the Downer 2013 issue, which matures later this month. You do not have to wait until maturity of the 2013 to reinvest. You can either switch early (you will still receive all accrued interest due) or you can opt for a long settlement on the 2018 to match the maturity of the 2013.

Holders of the Leighton 9.50% 28 July 2014 and Vero 6.75% 23 September 2014 bonds should also consider this on a similar basis, as these bonds will mature next year and reinvestment options should be considered.

Some other short dated fixed coupon bonds that investors may wish to consider switching out of in favour of the Downer 2018 and/or Qantas 2020 include:

  • Mirvac Group Funding 8.00% 16Sep16 (yield pickup – Downer: 85bps, Qantas: 120bps)
  • DBCT Finance 6.25% 09Jun16 (yield pickup – Downer: 69bps, Qantas: 104bps)
  • DBNGP Finance 8.25% 29Sep15 (yield pickup – Downer: 122bps, Qantas: 157bps)
  • Rural Bank 9.5% 12Feb15c (yield pickup – Downer: 68bps, Qantas: 103bps)

3. Sydney Airport Finance CIB 3.12% 20Nov30 ($99.98 / YTM 7.00%* / CPI+4.50%) - Retail and wholesale

For any investor who does not yet own an inflation linked bond in their portfolio, this bond is the best value in this sector.

Holders of the following inflation linked products may wish to consider the Sydney Airport Finance 2030 bond as an alternative:

  • ElectraNet CIB 5.205% 20Aug15 (yield pickup: 140bps*)
  • Rabobank CIB 2.805% 28Aug20 (yield pickup: 135bps*)

*Yields quoted on inflation linked products assume an average 2.50% inflation rate.

4. Swiss Reinsurance 7.635% 25May17c ($105.50 / YTM 5.91% / +241bps) – Wholesale only

Some bonds that investors may wish to consider switching out of in favour of the Swiss Reinsurance 2017c include:

  • Morgan Stanley FRN BBSW+1.80% 26May15 (margin pickup: 121bps)
  • Bank of Queensland FRN BBSW+3.75% 10May16c (margin pickup: 31bps)
  • Telstra Corp FRN BBSW+0.65% 01Dec16 (margin pickup: 155bps)

5. Cash Converters 7.95% 19Sep18 ($101.20 / YTM 7.65% / +379bps) – Wholesale only

6. G8 Education 7.65% 07Aug19 ($101.55 / YTM 7.31% / +325bps) – Wholesale only

7. Silver Chef Limited 8.50% 14Sep18 ($105.75 / YTM 7.09% / +323bps) – Wholesale only

If you own only one or two unrated issues, these are good opportunities to diversify your holdings. In particular, the Cash Converters bond is still good value relative to the other unrated issues.

These offers are expected to be taken up quickly, so please contact your FIIG representative for more information.