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

 

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

 

SYD, TCL And GPT Show Upside On Rate Reversion

Posted on | by Todd | Leave a Comment on SYD, TCL And GPT Show Upside On Rate Reversion

Over the last two weeks, yield sensitive names like SYD, TCL and GPT have all dropped over 10% from recent highs.

One of the main drivers has been the change in interest rate expectations from G-7 central bankers and the subsequent rise in short-term paper.

Moving forward, we see more likelihood of G-7 rates reverting lower within the year’s range and providing upside potential in the stocks above.

Other stocks we like on the basis of lower local rates are: AMC, WOW and MPL.

We see reasonable upside potential in the names and will employ the derivative overlay strategy (selling covered calls)  to enhance the portfolios returns.

Transurban

Sydney Airport

General Property Trust

 

ALGO Update: Buy Signals For GPT, SYD and TCL

Posted on | by Todd | Leave a Comment on ALGO Update: Buy Signals For GPT, SYD and TCL

Over the last three weeks, shares in local infrastructure and property trusts have really taken a beating.

Some of the yield-sensitive names have lost between 5 and 10% as Australian interest rates in the 2yr to 5yr tenors have followed global interest rates higher.

One of the major aspects of the recent rise in rates has been the consensus amongst G-7 central bankers that the era of low rates and financial stimulus will be coming to an end.

It’s our base case that the market has gotten ahead of itself with the prospects of sustainable higher yields.

With global equity markets still at elevated levels, a material repricing, or “risk-off” period, in the market would increase the demand for “safe haven” government bonds, which would ease rates lower.

The specific stocks that we are following include GPT, TCL and SYD.

The ALGO engine triggered buy signals in these three names at yesterday’s close.

Given the sharp sell off that these names have seen over the last few weeks, we feel the upside potential is an reasonable trade.

GPT

TCL

SYD

REIT’s & Yield Sensitive Stocks Offer Value

Posted on | by Leon Hinde | Leave a Comment on REIT’s & Yield Sensitive Stocks Offer Value

Domestic yield sensitive stocks are looking well supported as global yields in G7 economies retreat from recent highs.  The bond  market seems to be losing some of the optimism in the”reflation” trade.

Evidence of the retreat in yields can be seen in the US 10-YR treasuries where the yields are now trading down from 2.61% to 2.31%.

The impact of this is:  money is now flowing back to REIT’s, infrastructure, consumer staples and telecommunication stocks.

We’ve been promoting the selling of resources and buying of defensive yield names, for the past few weeks. We continue to see defensive yield names complimented with tight covered call options as the best way to deliver 10-12% cash flow whilst protecting capital.

Chart – SCG

Chart – GPT
Chart – TCL