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Mutual Daily Mutterings


Quote of the day…


“When Chuck Norris tells a joke above Will Smith’s wide, Will Smith slaps himself” – unknown






“Bear Down




“Those who cannot learn from the past are condemned to repeat it…”





Overview…”go hard, or go home…”


  • Moves: modest risk on… stocks , bond yields , curve , credit spreads , volatility and oil ….


  • No news is good news.  After bumbling along the bottom, and at times in negative territory, US stocks rallied in the end.  Sentiment was buoyed by Fed meeting minutes providing no signals that officials could perhaps turn more hawkish soon in a bid to smack inflation over the nose with rolled up monetary policy.  In the weeks since the Fed pow-wow, financial-market volatility has spiked as investors fret over the risk of a recession.  The minutes eased some of these concerns…for now, keeping in mind the minutes are somewhat stale.


  • The Fed minutes essentially confirmed that the Fed will be hiking rates at +50 bps clips over the next couple of meetings, not +75 bps that had been feared.  There was some disagreement over inflation expectations, but general agreement that prices are too high and the labour market too tight. Several officials flagged vulnerabilities in the Treasuries and commodities markets.  Bond yields did little on the day.


  • Fed speak…”most US policy makers saw half-point rate increases as appropriate at the next two meetings, consistent with Chair Jerome Powell’s comments. While they noted the potential for rates to go high enough to constrain the economy, there were hints of a possible pause — an “expedited” tightening would leave the Fed “well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.” (Bloomberg)


  • Talking heads…”after the July meeting, the Fed is likely to become more ‘data dependent’ with regard to rate hikes.”….“while the Fed has been under the microscope for quite some time now, it’s important to keep in mind that the minutes were from weeks ago, it’s possible that investors will be in wait-and-see mode until the next Fed meeting to get it straight from the source.”….”we got some confirmation that the Fed is going to stay aggressive for at least the next few meetings. However, investors seem to be getting more comfortable with the thought that ‘tearing the band-aid off’ quickly might actually be what we need.


  • Away from the US and the Fed, China’s economic growth plans look to be in tatters.  Premier Li noted yesterday that “economic indicators in China have fallen significantly, and difficulties in some aspects and to a certain extent are greater than when the epidemic hit us severely in 2020.” Consensus estimates have the Chinese economy growing +4.5% YoY this year, well below the government’s target of c.5.5%.  The main impediment to growth is the government’s stubborn commitment to zero COVID.  They’ve taken a page out of Chairman Dan’s COVID play book it would seem, or vice versa.



The Long Story….


  • Offshore Stocks – a volatile session, but in the end the Fed meeting minutes did enough to sway investor’s risk dial in the right direction.  The DOW gained +0.6%, the S&P 500 gained +1.0% and the NASDAQ +1.5%.  It was a reasonably broad-based rally with 75% of the S&P 500 advancing, and only two sectors in the red, Healthcare and Utilities, both by less than -0.1%. Top of the pops was Discretionary (+2.8%), Energy (+2.0%), and Tech (+1.2%).  The less hawkish than feared minutes have given the markets a modest and temporary sugar rush, but it’s safe to say we haven’t necessarily hit the bottom of the current cycle just yet.  There remains downside risk here, although if consensus is to be believe, inflation has peaked (at 8.0% Q4’21) – debateable, although I acknowledge we’re closer to the peak than not.


  • Local Stocks – modest gains yesterday in the ASX 200 (+0.4%), although it wasn’t exactly a high conviction day with 54% of stocks retreating.  Nevertheless, only three sectors failed to perform, Tech (-3.0%), Discretionary (-0.6%) and Healthcare (-0.3%).  Staples (+1.5%), Financials (+0.8%) and Utilities (+0.7%) were the best performers on the day, although bang-for-buck, Financials and Materials (+0.6%) did the bulk of the work.  Futures are pointing to modest gains (+0.2%).


  • ASX 200 Relative Strength Indicators


Source: Bloomberg


  • Offshore credit…


Source: Bloomberg, Mutual Limited, (Blue = 12m average, Red = last)


  • No deals or investor outreach events were announced overnight after the high-grade primary market sat empty on Tuesday, with the possibility that deals may be done for the week ahead of the Memorial Day holiday in the US.” (Bloomberg).  The spread on the Bloomberg U.S. Investment Grade Corporate Bond Index rallied for the second day in a row — the first time spreads have narrowed in consecutive sessions in three weeks – tightening 1 bp to +146 bps.


  • Reflecting slightly improved risk tone in stocks, we saw a reasonably aggressive improvement in synthetic markets with MAIN and CDX -3 – 4 bps tighter.  Senior Financials closed -3.5 bps lower also, while Sub Financials were -7.3 bps lower.


  • Local Credit…


Source: Bloomberg, Mutual Limited, (Blue = 12m average, Red = last)


  • More primary activity from the majors with NAB coming to market with an attractively priced three-year senior deal.  Recall ANZ priced a $4bn multi-tranche senior deal just two weeks ago, including a three-year fixed and floating tranche, which priced at +77 bps (initially guided at +80 bps).  Yesterday, NAB launch a three-year fixed and floating deal with guidance of +90 – 92 bps, which was +13 – 15 bps wide of where ANZ priced and +10 – 12 bps of where the curve was.  Since ANZ priced their deal, broad market spreads have been trending sideways, so the gap between NAB’s new deal and ANZ’s deal was somewhat meaningful.  Not surprisingly at these elevated levels, demand was strong.  By the third update the book was north of $3bn, with demand split two-thirds, one-third across the floater and fixed respectively.  Final pricing was tightened into +90 bps, which wasn’t as far as I thought it would tighten into, I was expecting something around +87 – 89 bps.  In the end the book was $3.3bn with $2.75bn priced, $1.65bn FRN and a chunky $1.1bn FXD line, at +90 bps.  Trader’s thoughts on the day…”having forecast a period of prolonged drought in domestic senior supply it was something of a shock to see NAB print a 3yr benchmark deal today. Should this have been a surprise? Some will cite the fact that NAB were able to achieve levels inside where WSTP issued in USD last week, but at +90 bps we have seen yet another widening and steepening in the senior curve. A solid order book ($2.75bln) across FXD and FRN tranches would suggest little in the way of mark to market fatigue from investors, but appetite will surely be waning.”  Note, the fixed line priced with a 3.90% coupon, nice!


  • Where the major bank senior curve closed as a result of the new deal remains varied.  We’re seeing some traders quote +110 bps for 5-year senior, yet we also saw it quoted at +105 bps.  The latter is better for my ego, because that’s closer to where major bank senior was trading when I made the claim that spreads had peaked.  Further, we actually sold ANZ’s recent 5-year senior line yesterday at +99.5 bps yesterday (too good to refuse), and that was post launch of the NAB deal. Bloomberg has the ANZ 5-year at +98 bps mid this morning, meanwhile ANZ’s recent 3-year is quoted on Bloomberg at +81 bps.  While levels quoted on Bloomberg and traded levels are two different matters, I think with the passage of time, the NAB deal will be reminisced about with teary eyed nostalgia. YTD major bank senior issuance in 2022 is north of $22bn, which is elevated relative to average annual issuance levels and substantially higher than 2021 issuance at the same stage of the year, just $1.4bn.  Obviously last year and 2020 were abnormal years with the RBA TFF.  The spread widening we’ve observed YTD in major bank spreads reflects normalisation of this issuance dynamic.


  • In the tier 2 space the drift widening appears relentless, another +2 – 3 bps wider yesterday.  Traders noted “we close the curve wider again in expectation that any new issue concession being made in senior space would need to be larger in T2. We saw some modest two-way flow from private bank type accounts, not enough to suggest that spreads will continue to leak wider.”  CBA’s Apr-27 call is at +217 bps, the 2026 calls at +202 – 207 bps and the 2025 calls at +190 – 192 bps.


  • Major bank 5-year senior vs Bloomberg AusBond Credit Index (FRN)…


Source: Bloomberg, Mutual Limited


  • Major bank tier 2 historical…


Source: Bloomberg, Mutual Limited


  • Bonds & Rates – a strong rally in local bonds yesterday, following the safe haven tone set by US markets the evening prior.  The fall in yields has the month to date losses in the Bloomberg AusBond ACGB index moderating, halving in fact, improving from -0.90% a day earlier to -0.42%.  Similar improvement across Semi’s (now -0.28% MTD) and fixed rate credit (-0.13% MTD), if not better.  If the trend persists, the fixed rate credit index could record its first positive returning month for the year.  US leads will likely neither hinder nor help the cause, very little movement in treasury yields overnight, if anything a very, very modest flattening driven by a token +1.5 bps increase in 2-year yields (10-year yields unchanged).


  • A$ Fixed Income Markets…


Source: Bloomberg


  • Macro – “AUSTRALIA 1Q TOTAL CONSTRUCTION FALLS 0.9% Q/Q; EST. +1.0%. In line with our expectations and reflecting a combination of supply issues, Omicron outbreak and bad weather. Building work done fell -1.3% to $30,111.8m. while Engineering work done fell -0.4% to $23,551.4m. These outcomes reflect broad-based weakness.” (BAML)


  • Our cousins across the ditch (pronounced ‘dutch’) raised rates yesterday to ‘nose bleed’ levels, 2.0%, or +50 bps on the day, note, yes that is sarcasm.  Some flavour from the RBNZ…”consistent with the economic outlook and risks ahead, monetary conditions need to act as a constraint on demand until there is a better match with New Zealand’s productive capacity. A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment” Hawkish guidance remains despite increased risks to the outlook…and headwinds are strong. Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing.”  The RBNZ signalled they now see cash rates peaking at 3.95% vs 3.35% previously.


  • More on the Fed minutes…pilfering some commentary from the wires…”there was something for everyone in the minutes for the Fed’s early May meeting. Hawks would have homed in on upward revisions to the Fed’s inflation forecasts and the view expressed by officials that rates may well need to rise beyond neutral (into restrictive) territory to curb inflation pressures. Doves on the other hand would have liked statements such as: “Participants judged that an appropriate firming of the stance of monetary policy, along with an eventual waning of supply–demand imbalances, would help to keep longer-term inflation expectations anchored and bring inflation down over time to levels consistent with the Committee’s 2 percent longer-run goal” or that “Many participants judged that expediting the removal of policy accommodation would leave the Committee well positioned later this year to assess the effects of policy firming and the extent to which economic developments warranted policy adjustments.” They would have also noticed that the Fed mentioned how a more volatile commodity price environment could have liquidity implications for trading houses, banks and broker dealers.” (Barrenjoey)


  • Charts:





Source: Bloomberg, Mutual Limited



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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: 0.50%
MIF – Mutual Income Fund
Gross running yield: 1.57%
Yield to maturity: 1.66%
MCF – Mutual Credit Fund
Gross running yield: 2.85%
Yield to maturity: 2.44%
MHYF – Mutual High Yield Fund
Gross running yield: 5.93%
Yield to maturity: 5.89%