FIIG - The Fixed Income Experts

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BondCast – The hot topic of the US dollar, our new DirectBond and a recent Aussie dollar issuance

by User Not Found | Sep 18, 2018

Cut your reading time and listen to a podcast instead. This week’s BondCast compares the AUD and USD, discusses the latest DirectBond from Harland Clarke and AT&T’s new Australian dollar issuance

Learn more about which bonds are on the move with this weekly podcast. This week our senior relationship managers discuss the AUD and USD, in particular repatriating funds back into Australian dollars, the latest FIIG originated bond for a leading provider of integrated payment and marketing solutions, Harland Clarke and the opportunities arising for investors from global debt giant, AT&T’s new Aussie dollar issuance. See the transcript below on the page.

Stay tuned for our weekly podcast to learn more about bonds and trade opportunities brought to you by our experts. We would welcome any feedback or questions, if you could please email


Jake Koundakjian
Director, Fixed Income Sales
Jake grew up in Ottawa, Canada, where he rose from a teenage bank teller to a portfolio manager overseeing more than $600 million in assets for the Bank of Nova Scotia. With over twenty years in asset management he moved to Australia seven years ago with his family.

Stephen Mackie
Director, Fixed Income Sales

Stephen Mackie is based in the firm's Brisbane office, managing investments for clients, ranging from individuals to institutions.

Stephen has over 25 years' experience in global markets, including his most recent role at QIC where he was a Director - Investment Specialist in the Global Multi-Asset team. Prior to this, he has held a variety of senior roles as a trader and portfolio manager with RBC Capital Markets, Citi, Kapstream Capital and the Commonwealth Bank.

Elizabeth Moran
Director, Education and Research

Elizabeth has been with FIIG for ten years and for much of that time has been a corporate and bank analyst. In recent years her passion for education has seen her role shift, to author/ edit FIIG’s “The Australian Guide to Fixed Income” and an online fixed income course for Financial Advisers. She continues to edit FIIG’s weekly newsletter, “The WIRE”.

In her role as Director of Education, Elizabeth has delivered presentations at conferences across Australia. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings, writing daily press releases for Bloomberg. Elizabeth spent five years in London, three working as a credit rating analyst for NatWest Markets.


[00:00:00] Elizabeth Moran: Hello, welcome to another edition of BondCast. My name is Elizabeth Moran, I'm director of Education and Research here at FIIG. Today I have with me, Steve Mackie and Jake Koundakjian.

[00:00:10] Both: Good Morning.

[00:00:11] Elizabeth Moran: Good Morning. I thought we would talk a little bit about the US dollar.

[00:00:15] Jake Koundakjian: Hot topic.

[00:00:15] Elizabeth Moran: It's in the news, it's up and down - people are recommending to buy US dollar securities at this point in the cycle. Steve, what are your views on the AUD versus US dollar?

[00:00:22] Steve Mackie: Well, I'm sort of contra. I think that the US dollar has had a good run. There's a reason for that. So I think while there's a good trend and there are solid fundamentals to hold on to US dollars, there comes a time when there is a value play to switch out of the US into liquid currencies like the Aussie dollar, which is what we're seeing investors do. You know, they've gotten into bonds that were around 84-85 US cents and they're switching back. So if things are cheap in Australia and people are taking profit, they've had a good coupon from the US bonds and a good currency experience, they're happy to repatriate back to AUD.

[00:01:10] Jake Koundakjian: I think it's important to warn listeners we're not FX advisers as well.

[00:01:13] Steve Mackie: Correct.

[00:01:13] Jake Koundakjian: In my experience the currency of any country is like the stock price of a country. So when I think of the US currency, I think of it like it's the stock price of the United States. When I compare that against Australia - how is the economy of Australia doing versus the economy in the US? I visualise it and I think no one has any clue. Important to know, that in these markets, I have no idea and nobody does. What I've noticed recently with FX markets, with the USD versus AUD, it's correlated with the tariff headlines against China. So it's been notable, at least to me, that the tariff seems to be driving that marketplace and also to some degree the negative property sentiment that's been building. Yes, there's always been a negative property sentiment but it certainly picked up some pace in the headlines in the last few months.

[00:02:11] Elizabeth Moran: Well, I guess to be fair the US economy is doing pretty well. And we're seeing funds flow out of emerging market economies back into USD. So that’s pushing the dollar higher and the AUD relatively lower. There are a couple of factors there, all contributing to a lower AUD, which really is what our experts are saying to us. They think it should be sub 70 cents.

[00:02:31] Steve Mackie: Yes, if we look at, you know, even Aussie government bond holdings by foreign residents - if you go back to the middle of last year when the yield differential between Aussie bonds and US bonds started to fall – it went down negative to the US, it's now about a 30 basis point pick up owning US Treasuries over Aussie bonds. We really saw that foreign investors deserted the Aussie market and that's been a trend that's been going for 12 to 18 months. I think, you know, if you go back you've had two decades of the carry trade with Aussie bonds, giving that risk premium, given we're a commodity country and that risk premium now doesn't exist. So if I’m a US investor in foreign markets, yeah, I'm happy to repatriate my funds back to the US. Donald Trump is providing plenty of fiscal incentives to repatriate more money back into the US, so that's what we're seeing.

[00:03:24] Elizabeth Moran: To be fair, I've been surprised that the Aussie dollar has stayed as high as it has. I don't know what you two think. I mean, I'm no foreign currency expert at all, just an observer. I've been surprised that it hasn't gone lower, so there must be some other positives holding it up there and I guess commodity prices might be one of those, right?

[00:03:44] Jake Koundakjian: Definitely. You know, I guess the Australian economy is not doing terribly. We're doing quite well, chugging along circa 3% growth, unemployment rate is under 6, maybe closer to 5. So we're not looking so bad here, so I can see why the AUD is not cratering versus the USD, we’re not going terribly here. I think it's hard to ignore the US dollar is part of a portfolio and that's when I say to clients, I like to keep their foreign exchange exposure to less than a third of their overall portfolio. It's hard to say no to the USD marketplace because it's so giant. The depth of choices they have versus the Australian marketplaces… it's hard to ignore. So it is a nice diversifier, not only from a foreign currency standpoint, but choice of company.

[00:04:32] Elizabeth Moran: Oh, it's massive. And you know I've looked at that high yield market for years and years and many years ago, like 20 years ago, I remember looking at a company thinking, and it was CCC rated, I thought, this thing's not got long for this world. And you know what, it's still going! So there are a lot of options out there! Which sort of leads us into a new DirectBond, we're making available from Harland Clarke, which print cheques. It's very much a declining industry, which I really don't like… I would not buy this bond. But that's just me. I don't like investing in declining industries. Jake, Steve, there's some positives there though aren't there?

[00:05:09] Jake Koundakjian: Yeah absolutely, it depends on your perspective. It is in structural decline. You know, I know not many folks are still using cheques. I certainly am not, not many are. They also have other divisions, the paper products division, which would also, I can imagine, be in some kind of decline, as well and a marketing division too. The bonds that we're looking at are the March 2020s. So it's about a year and a half to go before the maturity date kicks out at about 6% return. They've got good liquidity, a high recovery rate and there's no debt between now and 2020. So you know the pathway to that 2020 looks pretty clear, even in a declining industry overall.

[00:05:49] Elizabeth Moran: So that's 6%. And what's it rated?

[00:05:52] Jake Koundakjian: It's a B+ rated credit from memory. It's callable in six months, March 2019. So it does have an early call. So if that occurs, that is six months from today and it's mid September now. So six months from now and you'd be earning a 4.6% return for a six month hold. And again, I guess, yes, the company is in structural decline overall and I've seen plenty of industries do that for decade, after decade, after decade.

[00:06:23] Elizabeth Moran: That's so true.

[00:06:25] Jake Koundakjian: But we are comfortable with the repayments, any thoughts?

[00:06:30] Steve Mackie: I mean, I think like PMP in Australia, print media is in decline, but the US is a bit of a special case. I mean the US catalogue businesses, for example, has been around for literally hundreds of years with the emergence of eBay and Amazon. A lot of people said catalogue sales and direct marketing would also go into decline. And Harland Clarke does have a direct marketing sector to it. So I think structurally people are comfortable with using cheques in the US. They still use cheques. They're still a little bit less digitalised with banking than we are in Australia. So I think the tradition of walking into a bank branch and having a cheque book in the US, whilst it's not the bulk of the population, there is a certain element of the population that still feels comfortable using check books. My own mum still uses a bank passport and goes to the branch every week.

[00:07:22] Jake Koundakjian: And the legal...

[00:07:22] Steve Mackie: Everything that a lawyer touches tends to be on paper. So I think there's still a presence for cheque based commerce. Again the bonds are short maturity, we're talking two years, so for what the bond is paying and for the maturity risk that you're taking, it's a fairly good addition to the portfolio. I think again, let's think about diversification, you know, in the US, we've got lots of names on the platform that are oil related, mining related. This is an opportunity to get into what is effectively the consumer sector in the US. We've got bonds like Dean Foods that give you that consumer exposure and here's something that else  that gives you consumer exposure. And like we are saying the US economy is going great guns at the moment, all-time record job openings, unemployment at an all-time low, so I think the consumers still have got plenty of bang for their buck and getting in this sector probably gives you a bit more exposure to it.

[00:08:19] Elizabeth Moran: Certainly the short dated nature of the bond and the fact that there's no other debt in the way, it has cash on the balance sheet, they're all really positive for the company. Let's move on. I just want to talk very briefly about AT&T who issued an Aussie dollar bond.

[00:08:34] Jake Koundakjian: A jumbo.

[00:08:35] Elizabeth Moran: A jumbo! Yeah what was that, 1.35 billion? It was a big issue in the last week. Did you guys like that one?

[00:08:42] Steve Mackie: Yeah I did. So, multi tranche issue - we had a 5, 7 and 10 year tranche. FIIG participated in the 10 year tranche of this bond. Now this is a kangaroo bond, so it's very much targeted for offshore investors given it's not in any of the local domestic bond indices. I think the appeal of the global name would have attracted a lot of Asian buyers. So going back to the currency, Liz, the currency is at a low level. So for an Asian investor to get a BBB rated piece of paper to park their Aussie dollars, it's a pretty attractive option. So again you've got one of the biggest telecommunications companies in the world. It's not particularly cheap on a comparative basis, but you know, we are looking at the absolute yield on this bond and investors are getting it in their hands at about 4.6%pa.

[00:09:32] Elizabeth Moran: And I'm assuming it's fixed.

[00:09:37] Jake Koundakjian: Yeah, it's a fixed pay. AT&T is giant, I think they're one of the biggest debtors in the world from a company standpoint, at least in America, and they do have the Euro Dollar, they have Canadian Dollar, British Pound and now they're expanding out to different currencies. I mean when you've got the biggest amount of debt as a corporate credit you're going to have to spread the wings beyond just the USD and that's what they're doing. So good timing for them, there's certainly an appetite out of Asia.

[00:10:05] Steve Mackie: Yes and if readers of our Smart Income weekly newsletter will have noticed, the funding differential for offshore investors to raise money in Australia is favorable at the moment. So that's why we're seeing a lot of these kangaroo bonds. So we'll see a lot more of them over the next few weeks as that funding differential remains favorable for offshore investors.

[00:10:25] Elizabeth Moran: That's great. So if you're thinking that you might like some added diversification, and we have more bonds from those kangaroo issuers, let us know and we can try and get you in at first issue. That really wraps it up for today. Thanks very much for joining us. And if you have any feedback please let us know. Until next week!

[00:10:46] Both: Thanks Liz.