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Mutual Daily Mutterings

Quote of the day…


“Jazz, isn’t that just a series of mistakes disguised as musical composition”.…David St Hubbins of Spinal Tap





Chart du jour…margin debt vs S&P 500



“Do We Dare To Dream…?




OverviewMitch, Mitch, he’s our man, if nobody can do it, Mitch can …”

  • A mixed session in offshore markets overnight.  European stocks were smacked over the nose with a rolled-up newspaper.  US markets initially cowered in the corner fearing the same, down -1.3% at one stage, but then stocks rallied back as Senate Republican Leader Mitch McConnell offered the Democrats a deal on raising the debt limit through November in order to alleviate the near-term risk of a US government default. Note, he’s not offering to resolve the debt ceiling or suspend it. This is more of a tactical retreat in an ongoing battle. Treasury yields were choppy with the 10-year yield closing little changed in the end after an up-and-down session.  Oil and commodity prices took a breather after weeks of steady growth, while gas prices whipsawed, up sharply, then down sharply as Russia promised more gas to ease supply concerns – the sell-off here seeped into oil prices.
  • It’s somewhat ironic that stocks, more than treasuries, seem to give two-hoots about the possibility of a US default – at least that’s what last night’s price action suggests.  Historically when the debt ceiling debate has been on the contentious side, bond yields have actually rallied as the perceived probability of technical default has risen.  Why?  Because any default would be more about politics, not ability to pay.  Despite the seemingly absurd idea of a US default, US sovereign CDS has risen from historical lows of 9 bps to 12-month highs of 17 bps over the past month.  Aggressive moves, but for context, US CDS remains well below peak levels seen during the 2011 (62 bps), 2013 (35 bps) and 2015 (24 bps) debt-ceiling standoffs. The long run average (2008 – now) is 28 bps.  As the possibility of default nears, this could change rapidly.
  • US reporting season is coming up, kicking off in earnest next week.  Some street commentary…”the S&P earnings season will do little to temper commodity-fuelled inflation fears just as pent-up consumer demand fizzles out.”  Morgan Stanley is predicting a 10% – 20% correction led by tech stocks, stating “we think earnings estimates are too high.”  I’ve been banging that drum for a while now.  Across the street, JPMorgan is also concerned about inflation, saying their current concern is that the Fed will be quicker to hike if price pressures are more persistent than they anticipated.



  • Offshore Stocks – a whippy day with European markets bloodied at the close, which saw US markets open similarly roughed up, but then a temporary reprieve in the US debt ceiling malarky and a pull-back in oil prices gave bulls reason to cheer and markets turned moderately positive.  It wasn’t all one way, with 44% of S&P 500 stocks retreating, but only three sectors failed to recover lost ground on the day.  With oil down over -2.0%, no surprises in seeing Energy (-1.1%) as the worst performing sector on the day, followed by Materials (-0.3%) and then Healthcare (-0.2%).  Best performers on the day were defensives, which gives you a sense of how fragile risk sentiment is at present.  Utilities (+1.5%), Staples (+1.0%) and REITS (+1.0%) occupied the podium.
  • Local stocks – the ASX 200 opened on a positive footing given constructive leads, but then treasuries continued their sell-off, driving e-mini’s south, which saw the ASX 200 head below the hard deck for most of the day, closing down -0.6%.  Two-thirds of stocks retreated, while Energy (+0.6%) and Tech (+0.5%) were the only two sectors able to advance.  Driving the fun police bus was Discretionary (-1.3%), but it was Financials (-0.9%) that did most damage following APRA announcing changes to macro-prudential policies.  Staples (-0.8%) stumbled also.  Back to the Financials, and banks in particular, which closed down -1.2%. APRA’s macro-prudential changes were modest in the grand scheme of things.  Specifically, the regulator increased the serviceability buffer that is used to test borrowers’ capacity to repay a loan to 300 bps over the actual loan interest rate from the currently practiced 250 bps.   APRA noted a +50 bps increase in the buffer will reduce maximum borrowing capacity by around ~5.0% with only a “fairly modest” impact on housing credit growth expected.  Futures re point to modest gains at the open (+0.5%).



(Source: Bloomberg)


  • Offshore Credit – MQG priced a US$3bn multi-tranche deal overnight, including US$850m 4-NC-3 year fixed-to-float (and US$400m FRN) at T+67 bps (vs IPT of T+90 bps), a US$500m 6.5-NC-5.5 year fixed to float at T+95 bps (vs T+110 bps guidance), and $1.25bn 11.25-NC-10.25 year fixed to float at T+135 bps (vs T+155 bps guidance).  By my calculations the deals swap back around BBSW +47 bps, +101 bps and +167 bps respectively – not that the proceeds would necessarily be swapped back – chances are the proceeds will be used for offshore funding purposes.  No real local comps for MQG, which is the group holding company and tends not to issue into A$ markets.  Most local issuance for Macquarie is out of the bank operating entity.
  • Local Credit – the main event yesterday was the Bendigo & Adelaide Bank tier 2 deal, which priced at +148 bps (vs +155 bps launch guidance).  BEN riced $125m with the book hitting $330m (pre-JLM interest) at the last update.  Final pricing adjustment, to +148 – 150 bps WPIR, saw $45m of bids drop away.   At +148 bps, the deal priced -12 bps inside our calculated regional bank tier 2 curve of +160 bps (BEN, BOQ and SUN).  The deal offers just +7 bps step up over BEN’s Nov-25 callable line (+141 bps), which is flat by historical averages, reflecting the tight technical backdrop.   Trader comments…”secondary cash spreads closing mixed. Opco flows remained subdued, with some small extension trades. The curves have gradually steepened, with WSTP 08/24s now +10 bps over the past month and towards the wides for 2021. Focus in Higher Beta Subs/T2 space largely around supply, with some switching from accounts into the new deal”.  Seeing the new BEN line bid a basis point inside reoffer, but traders generally not seeing any takers at this stage.


(Source: Bloomberg)


  • Bonds & Rates – local bonds were smacked around the chops yesterday as rising energy prices fuel inflation concerns.  ACGB 10-year yields closed at their 15-week highs, 1.61%, or +53 bps up from their recent August lows (1.08%), and well up on consensus estimates for the end of Dec-21 (1.53%). A modest pull back in treasuries overnight should pause the recent and aggressive run up in yields as we head into US non-farm payrolls.  A strong payroll’s beat could see further upward pressure on yields.  On the US debt ceiling shenanigans, what would actually happen if the US did default of in its debt?  The answer is a big collective shrug of the shoulders.  No one really knows.  Talking heads…“as this is about willingness, not ability, to pay, investors in long-duration Treasuries should be reasonably sure that they will receive their principal when the bonds mature. And so, to the degree downside risk crystallizes in the form of an equity-market crash, a recession or even a financial crisis, Treasuries should rally as the market prices in a lower path of future U.S. policy rates”.  Somewhat ironically, again, treasuries would most likely be the safe haven asset in a US sovereign default scenario.  There’s history supporting this view.  The 10-year yield fell -40 bps in the two weeks before S&P took America’s AAA rating away from them in August 2011, and then by almost 50 bps in the following two weeks, including a 23 bp rally on the Monday following the announcement.  Cray cray!


(Source: Bloomberg)


  • Macro – main event is tomorrows US non-farm payrolls, although last night US ADP September employment change data came out, surprising to the upside (+568K vs +430K consensus, and +374K for August).  Some might think this is a decent lead indicator for non-farm payrolls, but the link between the two labour data series is generally tenuous at best.  In the last year or so, the initial print on ADP employment has come in below payrolls seven times and above five, with an absolute average miss of around 250K. That suggests a ~250K-750K potential range for this Friday’s payrolls print (consensus is at 500K). Word on the talking-heads grapevine is the number will be a modest miss to the downside with the whisper number at 476K.


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Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907



Mutual Limited Daily Update

Mutual Funds

MCTDF – Mutual Cash Fund
Gross running yield: 0.26%
MIF – Mutual Income Fund
Gross running yield: 1.40%
Yield to maturity: 0.78%
MCF – Mutual Credit Fund
Gross running yield: 2.62%
Yield to maturity: 1.70%
MHYF – Mutual High Yield Fund
Gross running yield: 5.49%
Yield to maturity: 4.24%