News
The paradoxical reaction to the latest wave of European convulsions and the US downgrade – a flood of investment funds into US Treasuries, with a consequent redoubling of the downward pressure on equities and non-core currencies – could be short lived. Some global strategists expect emerging and commodity market currencies to rebound in time as the realisation sets in that global markets no longer offer a single currency, risk free return.
The downgrade of the US sovereign rating by Standard & Poor's (S&P) on August 5, while far from a complete surprise, has left Australian analysts with the difficult job of decoding the final impact of divergent market responses. While the downgrade should pull US Treasury yields wider, the strategist consensus appears to be that the currently-irreplaceable status of Treasuries as 'risk free' assets will have a strongly counterbalancing effect.
Name-specific responses to the European sovereign debt crisis in the Australian dollar market have led the largest Kangaroo borrowers to adopt contrasting issuance approaches. European Investment Bank (EIB) (AAA/Aaa/AAA) has reduced its Kangaroo activity in response to pricing relativities, while KfW Bankengruppe (KfW)'s (AAA/Aaa/AAA) consistent issuance volume has seen it take over as the market's biggest borrower.
In a week overshadowed by global turmoil, just one deal priced in the Australian public markets. On the other side of the Tasman, World Bank (AAA/Aaa) issued a new Kauri deal on August 3 as market participants report that Kauri pricing levels have become more attractive in recent times. However, with investors' name-specific appetite divergent what remains uncertain is which borrowers are most likely to be able to seize future issuance opportunities.
KfW Bankengruppe (KfW) (AAA/Aaa/AAA) launched and priced a A$300 million (US$320.2 million) increase to its February 2018 Kangaroo on August 4. The tap is the third increase to the line, which was introduced in February 2011 at a size of A$500 million and now has A$1.55 billion outstanding.
World Bank (AAA/Aaa) priced a new NZ$300 million (US$258.7 million) five-year Kauri transaction on August 3, in what was its first deal in New Zealand's domestic market since July last year. New Zealand market participants say potential pricing for Kauris has grown closer to economic levels in recent times, although there has so far been just NZ$900 million issued in the format this year.
While Australian domestic banks await the final passage of legislation that will allow them to issue covered bonds, the Kangaroo market for covered bonds is experiencing steady growth. Four issuers have priced five deals so far this year for a total volume of A$2.9 billion (US$3.2 billion).
On July 27 International Finance Corporation (IFC) (AAA/Aaa) issued its first Kangaroo deal of 2011 with a new A$1.25 billion 5 per cent August 2016 bond and A$250 million of 2016 floating rate notes. The A$1.25 billion fixed rate tranche is the biggest Kangaroo deal issued since World Bank issued a A$1.5 billion 5.75 per cent 2015 bond in February 2010.
Rentenbank (AAA/Aaa/AAA) issued a A$500 million (US$551.9 million) increase to its April 2018 Kangaroo line on July 28, in what was the agency's first Kangaroo transaction in almost three months. It was the first tap to the line, which was inaugurated in April 2011 at a size of A$250 million.
International Finance Corporation (IFC) (AAA/Aaa) issued its first Kangaroo transaction of the year on July 27. The A$1.5 billion (US$1.7 billion) five-year deal is the largest Kangaroo to come to market this year from a supranational, sovereign and agency issuer. The majority of the deal is made up of the A$1.25 billion fixed rate piece.
What began as another quiet week in the Australian primary bond markets evolved into moderate deal flow across various sectors towards the end of the week. With a number of issuers reporting significant levels of reverse enquiry, sizeable issuance continues to be achievable as offshore interest in Australian dollar product appears strong.