19th May, 2025

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Headlines (19-May-2025)

** Primary muted as risk sentiment deteriorates following Moody's downgrade of US Sovereign

** New Zealand Contact Energy announces plans for new 6.5-year benchmark

** ACGBs off fresh session lows heading into the close, having broadly dipped below their opening

After an action-packed week which saw a collective A$5.2bn raised by seven issuers, the AUD primary market is taking a breather on Monday with no new deals announced.

That follows a rise in US Treasury yields after Moody's downgraded the US sovereign credit rating by one notch from Aaa to Aa1 on Friday, which is weighing on sentiment and creating headwinds for potential issuers looking to access the market.

Having said that, there was a new addition to the pipeline today in the shape of Contact Energy Limited ("Contact Energy"), rated BBB (Stable) by S&P, which has mandated banks (ANZ, NAB and Westpac) to arrange a series of fixed income investor meetings commencing on Tuesday, 20 May 2025.

A potential 6.5-year AUD-denominated Green fixed rate senior unsecured benchmark transaction may follow, subject to market conditions.

Contact Energy is one of New Zealand’s largest listed companies and is a diversified and integrated energy company focused on the generation of electricity and the sale of electricity, gas, broadband and mobile in New Zealand.

This upcoming transaction marks the issuer's return to the denomination after 18-months and will extend the issuer's maturity curve.

Contact Energy's previous issuance in November 2023 comprised of a A$400m 6.398% 21-Nov-2030 line that priced at ASW+170 from IPTs of ASW+175-180a. The deal was supported by a book of >A$760m, equating to a cover ratio of 1.9x. That is the issuer's only outstanding A$ line currently.

We have put together a list of potential comps of similarly rated utilities.

**Potential Comps**

TRGRID (Baa2) A$250m 5.77% 29-May-2030 @ ASW+138
CENNZ (BBB) A$400m 6.398% 21-Nov-2030 @ ASW+150
MCYNZ (BBB+) A$400m 5.247% 21-Mar-2031 @ ASW+137
ELECTR (Baa2) A$400m 5.3038% 10-Jul-2031 @ ASW+139
UELAU (A-) A$300m 5.417% 03-Feb-2032 @ ASW+132
ANVAU (Baa1/BBB+) A$700m 6.134% 31-May-2033 @ ASW+150

Snapshot of AUD deals priced in the week ending 16-May-2025. Click on the link for the full pricing details.

Round up of price action in the AUD government bond market on Monday 19th May and the drivers behind it. This report was originally published at 14:57 Sydney time today by Mooris Tjioe from the IGM Asia

ACGBs are just off fresh session lows heading into the close, having broadly dipped below their opening (also cheaper) levels after reversing an earlier, modest richening impulse, tracking losses in US Treasuries across Sydney dealing. Aussie bonds have also broadly underperformed regional peers as focus has centred around the RBA's upcoming monetary policy decision on Tuesday, with some participants likely remaining wary re: the Board possibly opting to make no change to the cash rate target

• YM is -4.0, not too distant from its overnight close of -6.0. XM is -6.5, down through its own overnight close of -5.0, marking a fresh session low at writing. Bills run 2 to 5 ticks cheaper through the reds, bear flattening
• There were no domestic data releases of note scheduled for today, leaving focus centred around positioning ahead of the RBA's 20 May monetary policy decision
• ICYMI, this week will see the sale of A$1.2bn of ACGB Dec-35 (Wednesday), A$800mn of ACGB Nov-28 (Friday). A$2.0bn of Notes (Thursday) and A$100mn of I/L bonds (Thursday) will also be on offer

Apart from that, there was scant reaction in ACGBs to the release of monthly economic activity data out of China. The Chinese housing sector weakened even further at a quicker pace, retail sales showed limited signs of flagging, while industrial production held up. The labour market tightened incrementally as well, while fixed investment marginally undershot forecasts - perhaps faring better than expected from a qualitative point-of-view, given obvious uncertainty around the external outlook for China.

• All in all, a decent result for the Chinese economy, perhaps showing its resilience in the face of the pressure campaign from the US on the trade front
• That being said, with participants cognisant of the official growth target of 5%, expectations for even more policy support from Chinese authorities will have likely grown following the release of data for Apr

On the RBA, most are expecting the Reserve Bank to cut the cash rate target by 25bp on Tuesday, with STIR markets currently pricing in ~24bp of cuts at that meeting - pointing to virtually fully priced in odds of that event

• The cut is expected to be justified by the return of inflation back within the target band, while well-documented external headwinds to the economy are also expected to factor into the mix, adding to the case for policy easing

That being said, there have been several high-profile calls for the RBA to opt for a hold instead. Recall that last week saw former RBA Board member McKibbin said that the RBA should keep the cash rate target unchanged next week owing to Australia's "very large" fiscal stimulus and essentially neutral monetary policy settings

• McKibbin also pointed out that inflation is "only just under the band", while the labour market has remained strong (ICYMI, the Apr labour market report showed a large jump in hiring on Thursday)
• He said that he "would sit until we know a little more about the spillovers from the restructuring of the global economy from President Trump"

Elsewhere in the country, the Australian Productivity Commission has said that domestic productivity growth is at its "lowest ebb in 60 years", noting that it is due to deliver its final report in Dec. Not much by way of surprises here, with Australian growth in recent periods having been powered more by population growth than productivity gains

• With inflation looking to be under control for now, it doesn't seem like there will be much by way of a reaction drawn from the RBA on this matter, with low Australian labour productivity hardly being a fresh topic for the Board as well

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