Listed Debt Securities Indices Performance Review
A supply squeeze is driving prices up and yields down
As at the end of May a clear trend for the ASX-listed debt securities market has emerged for the year to date. And unless there is a significant change to the demand and supply dynamics of the market or a systemic shock, the trend is expected to continue.
Over the course of this year more than $9.1 billion of securities are due to be called or will mature. This is the largest annual volume of securities to exit the market, yet seen.
Of the securities that are due to be called or mature this year, $2.1 billion have already departed and a further $2.4 billion approximately will do so this month.
Yet new issuance for the year to date amounts to less than $3.5 billion and no further issuance has been flagged. While more issuance over the remainder of the year is likely, it is also likely that total issuance for 2017 will be somewhat less than the value of the securities that will have been withdrawn from the market.
In short, supply is being squeezed and prices of the remaining securities are being driven up by investors desperate for yield.
Chart 1 below shows that yields across most of the Australia Ratings family of listed debt securities indices have been falling since the end of the first quarter of the year. In the first quarter new supply was seen in the form of the $1.64 billion PERLS IX issue from the Commonwealth Bank (CBAPF) and $943 million Subordinated Notes 2 issue from nab (NABPE).
Source: ADCM Services, Ord Minnett
Debt Securities’ Level of Complexity (PCI):
Green - simple; Blue – relatively simple; Yellow – complex; Orange – more complex; Red – very complex; Black - Combined
To illustrate the price/yield impact of constrained supply more starkly, the weighted average security price across the Composite index at the end of May was $102.73 (some securities are trading at prices of more than $106.00), at the end of 2016 the weighted average price was $101.70. Over the same period, the weighted average yield has fallen to 5.08% per annum from 5.57%.
Deciphering the performance of individual indices is a little more challenging, given that the indices are accumulation indices and not just simple price indices.
Chart 2 illustrates how the Red index, which comprised almost entirely of bank Additional Tier 1 capital securities, has broken away from the pack since around the middle of last year. These high risk securities provide the highest returns when investors are not risk averse.
Performance softened over the last month as two new securities entered the index, the PERLS IX and Challenger’s Capital Notes 2 (CGFPB) but the index has delivered a total return of just over 12% since inception at the end of 2014.
Yet the Green index comprised of simple, senior corporate bonds has also been a strong performer since inception, and hasn’t displayed the volatility of the Red index. The Green index has provided a total return of 8.12% since inception but has softened over the last month as the new Villa World bonds (VLWHA) have entered the index and some profit-taking has been seen in the very expensive Tatts bonds (TTSHA).
The yellow index improved over the month as the prices of the Crown Resorts subordinated notes continued to strengthen, but the Orange index softened noticeably with the inclusion of the new nab Subordinated Notes 2, which are weighing on the index. The Yellow index has returned 8.27% since inception, thanks to the recovery from the weakness in the price of the Crown subordinated notes over that time, while the Orange index has returned a more subdued 4.20%.
The Composite index has returned 8.64% since inception, while the Unfranked and Franked indices have returned 7.12% and 9.13%, respectively.
Source: ADCM Services, Ord Minnett
Green - simple; Blue – relatively simple; Yellow – complex; Orange – more complex; Red – very complex Dotted dark grey - Unfranked; Dotted light grey - Franked; Black - Combined