US Yield Curve Continues To Flatten

Posted on | by Todd | Leave a Comment on US Yield Curve Continues To Flatten

Even though the US Stock market has stabilized over the last week, the US Treasury curve continues to flatten.

As illustrated in the chart below, the difference  between the US two and 10-yr bonds has now dropped to 46 basis points (2.36% vs 2.82%).

This is the first time since 2007 that this spread has narrowed below 50 basis points, and, in the past, has been a level which has foreshadowed recessionary pressure.

It’s our base case that the bulk of the curve flattening has been a result the two-yr yields rising quickly and the longer dated yields trading sideways to lower.

In this respect, we would expect some of the local yield names to find some buying support this week.

Some of the stocks we prefer include; TCL, SYD, WFD, AMC and GPT.

For more information about how to trade the US yield curve, call our offices on 1-300-614 002

2-yr versus 10-yr yield spread

Transurban

Sydney Airport

Westfields

 

 

 

Stress Is Building In the Inter-bank Lending Market

Posted on | by Todd | Leave a Comment on Stress Is Building In the Inter-bank Lending Market

While much of the financial media has been pointing to the threat of a trade war as the source of recent market volatility, we have also noticed rising stress in the inter-bank funding market.

As illustrated in the chart below, the LIBOR-OIS spread has spiked from 22 basis points to almost 60 basis points over the last 5 weeks.

The LIBOR-OIS spread reflects the amount of premium one bank requires from another bank to loan them money.

In simple terms, when banks start to question the financial health of other banks, the spread widens.

Rising funding costs are a headwind to global equity markets, which in turn acts to dampen bond yields; especially in the longer end of the curve.

The practical impact of this dynamic has been seen in the recent firming in some of the local interest sensitive names.

At these levels, we prefer the long side of SYD, TCL, SCG and WFD

LIBOR-OIS Spread

Sydney Airport

Transurban

Scentre Group

Westfields

Property Stocks Find Buying Interest

Posted on | by Leon Hinde | Leave a Comment on Property Stocks Find Buying Interest

As the US yield curve flattens, which is caused by the long-end of the curve no longer increasing at the same rate as the shorter-end, we’ve started to see institutional money flow back into ASX listed yield sensitive names.

Our preference among these, within the property sector is GPT, SGP, and WFD, (based on valuation grounds).

Within Utilities and Infrastructure, we continue to like AGL, SYD and TCL.

 

 

U.S. Retail Sales Weighing On Rates

Posted on | by Leon Hinde | Leave a Comment on U.S. Retail Sales Weighing On Rates

U.S. Retail Sales fell for a third straight month in February as households cut back on purchases of motor vehicles and other big-ticket items, pointing to a slowdown in economic growth in the first quarter.

Consumer spending, which accounts for more than two-thirds of U.S. GDP, appears to have slowed at the start of the year.

The combination of weak consumer spending data and global manufacturing data has been enough to see yields run into resistance.

The peak optimism on synchronized global growth and inflation pick-up, now appears to have passed.

With yields moving lower, we’re likely to see a better environment for the yield sensitive sectors. Telecommunications, Utilities, Consumer Staples and Real-Estate.

Some of the local names in these sectors include: SYD, TCL, AGL, GPT, SCG and WFD.

The chart below illustrates the yield on the 30-yr bonds falling relative to the shorter dated 2-yr bonds. This is typical during a period of slower economic growth.

 

 

Yield Names Get A Boost From Lower US Rates

Posted on | by Todd | Leave a Comment on Yield Names Get A Boost From Lower US Rates

As US 10-year bond yields pull back from recent highs, shares in local yield sensitive names have been lifted off their recent lows.

The inverse correlation between US interest rates and GPT, SYD and TCL  has been acute over the last 3-months.

Since January 1st, US 10-year yields have risen over 20%, climbing from 2.40% to reach a 4-year high of 2.95% last week.

During this same period, the share prices of GPT, SYD and TCL have all dropped by over 10%. However, both SYD and TCL gained over 2% on Friday.

It’s our base case that the US 10-yrs will find resistance at the 3% level and offer upside price action in the local yield names.

All three of the above names are included in our ASX Top 50 model portfolio.

We expect to see price appreciation in the 4% to 6% range over the near-term as US yields retrace lower.

 Sydney Airport

Transurban

 

The US Government Is Back Open………….Until February 8th

Posted on | by Todd | Leave a Comment on The US Government Is Back Open………….Until February 8th

The US Senate was able to agree on a short-term resolution to allow the Government to reopen until the 8th of February.

The US has not had a properly ratified budget since 2009 and these “stop-gap” agreements are now getting shorter in duration.

The DOW, S&P 500 and the NASDAQ all responded by making new all-time highs.

Interestingly, as illustrated in the charts below, not only are the 2-yr Treasury notes now yielding more than the SP 500 in the last 10 years, but the Index itself is the most overbought in history.

We suggest that the extreme valuations on Wall Street will soften US yields over the medium-term.

As such, we would expect to see buying interest in the ASX yield names such as TCL, SYD and WFD .

Our ALGO engine currently has flagged buy signals in TCL and SYD at $11.70 and $6.80, respectfully.

2-yr versus SP 500 yields

SP 500 Sentiment Oscillator

 

 

 

 

 

ALGO UPDATE: Stay Long Transurban

Posted on | by Todd | Leave a Comment on ALGO UPDATE: Stay Long Transurban

We added TCL to the model portfolio on July 3rd at $11.70 and our ALGO engine triggered a buy signal on July 12th at $11.20.

With its $9 billion pipeline of road projects over the next 7 years, the stock should be well supported with increased longer-term cash-flow numbers.

For the six-month period ending December 31st, TCL will pay 28.5 cents per share and a total of 56 cents per share over fiscal 2018.

This equates to 4.5% with the share price at $12.40 (plus some limited franking credits.)

We see the next resistance level at the December 19th high of $13.15.

Transurban

Softer US Yields Could Lift Local Names

Posted on | by Todd | Leave a Comment on Softer US Yields Could Lift Local Names

The recent move higher in longer-dated US Treasuries has created a headwind for some of the yield sensitive names listed on the ASX.

Over the last 10 days, the US 10-year notes have risen from 2.28% to just under 2.50%.

This 10% move has also lifted the 2yr to 30yr spread from 85 basis points to a full 100 basis points.

The impact on local shares has been a 4.5% drop in TCL and a 3.3% fall in SYD.

Looking forward, it’s reasonable to expect the US yields to soften and the yield curve to flatten.

Given the current correlation to the local shares, we see the US flattening trade as potential positive for the local names such as TCL, SYD, WFD and GPT

US 2yr versus 30yr spread