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Listed Debt Securities Indices Performance Review


August 2016

The Red Index Leads in August

The on-going search for yield has pushed the Australia Ratings family of indices for ASX-listed debt securities higher over the month of August. The Combined index increased by 1.26% over the month (1.07% in July) as the weighted average yield generated by constituents fell to 5.50% per annum from 5.78% at the end of July.

The Red index (very complex debt securities) recorded the strongest performance, increasing by 1.60% over the month.

This index comprises most of the Additional Tier 1 capital (hybrid) notes issued by banks and other financial institutions. It is the largest sector of the market, and is growing even larger as senior and ordinary subordinated debt issuance is becoming increasingly rare.

Offering the highest yields available in the market, it is the sector that attracts the most investor attention; and perhaps overly so. Investors drove down the weighted average yield of the Red index by 40bps over August to 5.82% per annum.

This is the lowest weighted average yield yet seen for the index. The sector is possibly looking overheated.

Indeed, the Red index now leads all of the Australia Ratings indices, increasing by 5.95% since inception.

Chart 1 - Listed Debt Securities Indices Performance by Product Complexity


Source: ADCM Services

The higher yields offered by the constituents of the Orange index (more complex debt securities) also attracted investors’ attention, resulting in the index moving 1.09% higher over August. The weighted average yield for this group contracted to 4.06% per annum, from 4.55%.

The Yellow index (complex debt securities), which covers those subordinated note issues which allow deferrable but cumulative distributions, returned 0.63% over the month.

The index has performed strongly in recent months as the prices of the CWNHA and CWNHB notes have recovered from the low levels seen in the first couple of months of this year. However, the price of the former actually fell over the month, while the price of the latter increased by only a comparatively modest amount.

Nevertheless, it is these two note issues that push the weighted average yield of the Yellow index to a comparatively nose bleeding 6.12% per annum – the highest of all the indices.

The WBCHA subordinated note is now less than 12 months from its call date, and as a result the Blue index has been discontinued. The WBCHA note was the last member of the Blue index.

The Green index (simple debt securities), which comprises the simple, senior ranking debt securities listed on the ASX, finished August with a relatively low weighted average yield of 3.78% per annum. And while the index returned only 0.13% for the month, it remains one of the strongest and most consistent performers.

The index has increased by 5.33% since inception.

Chart 2 - Listed Debt Securities Indices Performance - Franked vs Unfranked


 

Source: ADCM Services

 

The outperformance of relatively simple debt securities over time is reiterated in the performance of the Unfranked and Franked indices.

It is the more complex securities that generate returns with franking credits and thus comprise the constituents of the Franked index. Driven by the performance of the constituents of the Red index and some of the constituents of the Orange index, the Franked index returned 1.48% for the month of August but has increased by just 3.46% since inception.

The Unfranked index has increased by 5.72% since inception but over August the index returned a modest 0.83%.

 

Chart 3 - Listed Debt Securities Indices Performance - Weighted Average Yields


 

Source: ADCM Services

Index data is sourced from ADCM Services.


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