Listed Debt Securities Indices Performance Review

February 2017

Prices soften as supply increases

February has seen a change in secondary market conditions for ASX-listed debt securities. In other words, prices have fallen for some securities relative to where they were at the end of January.

The reason for the decline is the resumption of primary issuance for the year. And with three issues announced in February, with known investor demand sitting at $2.6 billion and likely to go higher before these issues commence trading, 2017 could be a big year, unless the volume already coming to the market quickly sates investors’ appetites.

Not surprisingly, with $1.8 billion of the known new supply poised to enter Australia Ratings’ Red index, this index declined over the month by 0.14% or 1.71% on an annualised basis.

However, it should be remembered that the Australia Ratings’ family of ASX-listed debt securities indices are accumulation indices. If the indices were simple price indices, the fall in the Red index would have been more than twice as large, at 0.38%.

And while the constituents of the Red index form the largest group in the Combined index, it was the distributions declared during the month by the members of other indices that prevented a decline in the Combined index. The Combined index increased by just 0.05% over February.

See Combined & Individual Indices, Franked and Unfranked Indices and Weighted Average

Green Index - strongest performer

The best performance was again seen in the low risk Green index for senior ranking bonds. The index increased by 1.25% or 16.12% on an annualised basis.

This strong performance is attributable to strong price growth in the Australian Unity simple corporate bonds (AYUHB), which had gone ex-distribution in January. The price of the securities jumped to $105.10, after ending January at $103.45.

Similar price performance was seen from the Tattersalls’ (TTSHA) bonds. At the end of December the bonds appeared very expensive on a relative value basis and thus the price eased in January, but after ending the month at $103.08, the price at the end of February had jumped to $104.50.

The Yellow index also performed well, increasing by 1.06% over the month. Continuing increases in the price of the Crown Resorts subordinated notes, CWNHA and CWNHB and the latter in particular, are the cause.

The Orange index also increased over the month but by a more modest 0.71%. Distributions declared during the month made a significant contribution to the increase in the index.

Chart 1: Listed Debt Securities Indices Performance - Combined excluding the Unfranked and Franked Indices

Source: ADCM Services, Ord Minnett

Debt Securities’ Level of Complexity (PCI):
Green - simple; Blue – relatively simple; Yellow – complex; Orange – more complex; Red – very complex

The weakness in the Red index is reflected in the Franked index, which includes many of the same constituents. The Red index increased by only 0.03% over the month.

The Unfranked index performed better, increasing by 0.99%.

Chart 2: Listed Debt Securities Indices Performance - Franked and Unfranked Indices

Source: ADCM Services, Ord Minnett

Weighted Average Yield – Red Index increased as new supply enters market

The weighted average yield of each the indices tells the story about price movements, as yields move inversely to prices, and this removes the impact of distributions on the accumulation indices.

The weighted average yield of the Red index reached a low of 5.84% per annum at the end of 2016. The yield increased by 2bps in January but by the end of February it had jumped to 6.04%, clearly showing the impact of the new supply coming into this index.

This again shows up in the weighted average yield of the Combined index, which increased to 5.70% at the end of February, up from 5.63% at the end of January. The Green, Yellow and Orange indices experienced further contractions in weighted average yields to 3.90%, 5.90% and 3.71% per annum, respectively.

The apparent discrepancy in the weighted average yields of the three indices is due to the idiosyncratic characteristics of individual issuers in the indices.

Chart 3: Movements in Weighted Average Yields by Indices from December 2014

Source: ADCM Services, Ord Minnett


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