Bloomberg Indices Month in Review – April 2016

1 May 2016 /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

Month in Review ...... 2 Australian Market Performance ...... 5 New Zealand Market Performance ...... 7 Global Market Performance ...... 9 Market Yields ...... 10 Supply ...... 12 Maturities and Removals ...... 13 Index Market Capitalisation ...... 14

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Month in Review

The month of April saw central banks remaining unchanged in their monetary policy settings and further information on global policy and reform agendas.

Interest rates overview

On 5 April, the Reserve Bank of Australia (RBA) left the cash rate unchanged at 2 percent. According to the RBA, economic growth of 3.0 percent over 2015 was stronger than had been expected in February. Low wage growth, domestic cost pressures and global inflation combined with a strengthened Australian dollar were expected to translate to a low inflation environment in Australia for the next one to two years. The RBA expressed the view that even if the recent improvement in commodity prices becomes sustained, it would be unlikely to lead to any material change in mining investment for the next two years. Employment conditions were stronger than a year earlier, as the unemployment rate has fallen since mid-2015 and the participation rate has increased.

On 28 April, the Reserve Bank of New Zealand (RBNZ) left the official cash rate unchanged at 2.25 percent. It noted a deterioration in global growth outlook and improved yet weak commodity prices. Furthermore, dairy export prices remain "below break-even levels for most farmers". Indicators suggest a pick-up in house price inflation in Auckland. The NZ domestic economy has been supported by strong inward migration, construction, tourism and low interest rates, while inflation remains under control.

On 14 April, the Bank of England's Monetary Policy Committee (MPC) maintained the bank rate at 0.5 percent and its asset purchase program at £375 billion. Although inflation increased to 0.5 percent in March, this remained well below the central bank's target of 2 percent. The pound and risk free rates have also declined in the United Kingdom, with much uncertainty arising from the upcoming ‘Brexit’ referendum. The MPC noted that the referendum would make macroeconomic and financial market indicators more difficult to interpret in the next few months, and hence it would likely react more cautiously to data over the period than normal. It also indicated any future rate hikes would likely be lower and more gradual due to persistent headwinds, although monetary policy would ultimately be guided by economic circumstances.

On 21 April, the European Central Bank (ECB) held interest rates steady, with the main refinancing operations, margin lending facility and deposit facility set at 0, 0.25 and -0.40 percent respectively. The central bank also released further details of its expanded asset purchase program into the corporate sector from June 2016 onwards, which was announced in March. Broadly, the ECB will coordinate purchases among six Eurosystem national central banks (Belgium, Germany, Spain, France, Italy and Finland) (see below for more).

On 27 April, the US Federal Reserve left interest rates unchanged at 0.25 to 0.50 percent. The Fed reaffirmed its message from prior months, that future interest rate decisions would be guided by economic data in relation to its employment and inflation mandates, as well as financial and international developments. However, the Federal Reserve Open Markets Committee (FOMC) expects economic conditions to "evolve in a manner that will warrant only gradual increases in the federal funds rate" and would likely remain "for some time" below expected long term levels.

On 28 April, the Bank of Japan (BoJ) maintained its monetary policy settings, despite market expectations of an expansion in light of recent weak economic indicators. This saw the US dollar fall 3 percent to 108.11 against the yen, while the Japanese Topix and Nikkei indices both fell more than 3 percent. Economic growth has been sluggish mainly due to the impact of slowing emerging market economies on exports and production. The outlook for CPI (excluding fresh food) is “likely to be about 0 percent for the time being” year on year due to lower energy prices. The Japanese yen ended the month more than 5 percent higher at 106.50 against the US dollar, reaching its highest level since October 2014.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Additional highlights

In early April, the Australian dollar rose in line with improved commodity prices and a downward revision of US interest rate expectations. The Australian dollar reached an intra-month high of 78.18 US cents on 19 April. However, on 27 April, Australian inflation figures released for the March quarter showed inflation fell 0.2 percent to 1.3 percent, the lowest since the 1990s. The downside shock saw the Australian dollar drop over 2 percent to 75.91 US cents, as investors increased expectations of an interest rate cut. The Australian Government is set to release the 2016-17 Federal Budget on 3 May.

On 7 April, data released from the People’s Bank of China (PBOC) showed China's foreign exchange reserves had increased by $10.26 billion to US$3.21 trillion in March. This was the first increase in five months, following large outflows earlier in the year. The PBOC also announced it would begin to publish foreign reserves denominated in Special Drawing Rights (SDRs) from April onwards, citing the stability afforded by a basket of securities. China's SDR-denominated foreign exchange reserves stood at SDR 2.28 trillion at the end of March. The Chinese yuan is set to join the basket of reserve currencies comprising the SDR later in 2016. Separately on 13 April, the China-led Asia Infrastructure Investment Bank (AIIB) signed its first co-financing framework agreement with the World Bank. The partnership will underpin joint development projects later this year. The AIIB expects to approve about US$1.2 billion in financing in 2016.

On 14-15 April, the second G20 Finance Ministers and Central Bank Governors' Meeting was held in Washington DC, following the first meeting in February. The global finance leaders committed to "using policy tools – monetary, fiscal and structural – individually and collectively to foster confidence and strengthen growth". The leaders acknowledged the limitations of monetary policy and pointed to a role for fiscal strategies to support growth, including high-quality investment. The group reiterated a restraint from competitive currency depreciation and supported examining a potentially broader use of the IMF's SDR. The G20's International Finance Architecture (IFA) Working Group has been investigating, inter alia, reporting in SDR, SDR-denominated bonds and GDP-linked bonds. It has also been working on promoting inclusion of enhanced contractual clauses into new and existing stock of sovereign bonds and enhancing the orderliness and predictability of sovereign debt restructuring processes. The Working Group was re-activated when China took over the G20 Presidency in December 2015.

On 20 April, Argentina returned to the international markets by issuing US$16.5 billion in debt. The deal was the biggest one-day issuance of a developing nation on record and was heavily oversubscribed, with about US$70 billion in demand. Proceeds were used towards paying investors in a settlement over its defaulted debt. The benchmark 10-year bonds offer a coupon of 7.5 percent and were issued at par, with US$6.5billion on offer. Other tenors included 3, 5 and 30-year maturities, with issuances of $2.75bn, $4.5bn and $2.75bn respectively. These also priced at par, except for the 30-year bond, which priced at a yield of 8 percent. Argentina had previously been locked out of capital markets since its 2001 debt default.

On 22 April, the Japanese central bank released its Financial System Report. The report noted that the QQE with a negative interest rate policy setting was gaining traction, with market rates declining further and lenders rebalancing by increasing their lending activities. However, this was constrained by markets having to adapt to a new environment of negative rates and increased risk aversion due to heightened volatility in global financial markets. Although negative rates places downward pressure on bank profitability, the BoJ thought banks were generally sufficiently capitalised for the meantime. The report also acknowledge that a negative rate policy required balancing the risks of overheating (macro risks and asset price inflation) on the one hand and the erosion of bank profitability causing a decline in the credit transmission mechanism on the other. Furthermore, the report noted signs indicating a deterioration in the liquidity of Japanese government bonds (JGBs), as well as increasing investor risk aversion since the summer of 2015, reflected by a fall in equity prices and a rise in the yen and foreign currency funding costs. Japanese financial institutions’ domestic loan portfolios have grown at 2 to 2.5 percent year on year. Corresponding growth figures for their overseas loan portfolios are about 10 percent.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// In April, the ECB released further details for its Corporate Sector Purchase Program (CSPP), which is set to commence in June. The program will cover investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area. The latter criteria is based on the location of incorporation of the issuer, however issuers incorporated in the euro area whose ultimate parent is based outside the euro area will also be eligible. Maturities of eligible securities can range from 6 months to 30 years. Securities must also be eligible for the Eurosystem’s collateral framework, used to determine acceptable collateral for monetary policy credit operations. A general issue share limit of 70 percent per international securities identification number (ISIN) will apply, based on amount outstanding. Separately, the ECB signed a memorandum of understanding for cooperation in central banking activities with the Central Bank of Brazil on 16 April.

The Brexit referendum has caused swings in the British pound during the month. The currency progressively weakened to be down more than 2 percent for the month by 7 April against both the US dollar and euro. However, this had reversed by the end of April, as the pound finished up for the month by 1.13 percent and 1.45 percent against the euro and US dollar respectively. The turnaround appeared to coincide with an official visit to the UK by US President Obama on 21 April, who indicated in a speech that the US was focused on negotiating a trade deal with the larger EU bloc and therefore the UK would come behind the EU in negotiating a US trade deal if it should leave the EU.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Australian Market Performance

The AusBond Composite Bond Index returned 0.26 percent in April, reversing the previous month’s loss. However, it continued to be dominated by a strong performance in its equities counterpart: the S&P/ASX 200 Accumulation Index was up 3.37 percent in April, recovering the steep losses in January to move back into positive territory for the year. However, the AusBond Composite Bond index has outperformed the equities index by 179 percentage points so far since the beginning of the year, as well as on a 2 and 5 year basis.

Generally, the AusBond Indices reversed their previous months’ performance: indices that performed relatively well last month fared less well this month and vice versa, except for the Credit and Bank Bill indices. Inflation indices performed the poorest, consistent with the poor March quarter inflation results reported in April. The Credit Index performed the strongest, returning 0.54 percent, while the Government Inflation Index performed the worst by returning -1.33 percent.

Table 1. AusBond Total Return Performance: April 2016

Total Return Index Apr Mar QTD 12 MTH YTD 2 YR 5 YR AusBond Composite Index 0.26% -0.21% 0.26% 3.38% 2.32% 6.11% 6.58% AusBond Treasury Index 0.13% -0.36% 0.13% 3.23% 2.46% 6.41% 6.30% AusBond Semi Govt Index 0.31% -0.12% 0.31% 3.86% 2.41% 6.46% 7.02% AusBond Supra/Sov Index 0.38% -0.10% 0.38% 3.05% 2.02% 5.37% 6.46% AusBond Credit Index 0.54% 0.02% 0.54% 3.24% 1.97% 5.32% 6.65% AusBond Bank Bill Index 0.20% 0.20% 0.20% 2.26% 0.78% 2.47% 3.19% AusBond Inflation Index -1.27% 0.43% -1.27% -0.30% 0.48% 6.53% 7.31% AusBond Govt Inflation Index -1.33% 0.43% -1.33% -0.46% 0.41% 6.37% 7.06% AusBond Credit Inflation Index -0.40% 0.36% -0.40% 1.91% 1.46% 8.57% 9.97% S&P/ASX 200 Accum Index 3.37% 4.73% 3.37% -4.93% 0.53% 2.37% 6.47% Source: Bloomberg Finance L.P. Note: 2 and 5 year returns are annualised.

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2.0%

1.7% 1.6%

1.4% 1.3%

1.5% 1.3%

1.2%

1.0%

1.0% 0.8%

0.6%

0.3%

0.3% 0.3%

0.5% 0.3% 0.0% 0.0%

-0.5%

0.2%

0.3% Monthly Return (%) Return Monthly

-1.0% -

0.9%

0.9% -

-1.5% -

1.1% -

Monthly Retn Prior year comparison

Source: Bloomberg Finance L.P.

Chart 2. S&P/ASX200 Accumulation Index vs. Bloomberg AusBond Composite Bond Index: Monthly Return Performance 2015/2016

6.0%

4.7%

4.4% 4.4%

4.0% 3.4%

2.7%

1.3% 1.2%

2.0% 1.0%

0.6%

0.4%

0.3%

0.3% 0.0% 0.0%

-2.0%

0.2%

0.7%

0.9%

- 1.8%

-4.0% - 3.0%

-6.0% -

Monthly Return (%) Return Monthly

5.3%

5.5% -

-8.0% - 7.8%

-10.0% -

AusBond Composite Bond S&P ASX 200 Accum

Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// New Zealand Market Performance

The NZBond Index continued to record positive gains across the board in April, a consistent monthly trend since January 2016. However, the gains have generally been progressively smaller each month. Although the NZBond Composite Index was again outperformed by its equities counterpart, the S&P/NZX 50 Gross Index, NZ equities did not repeat their exceptional performance recorded in March. Among NZBond Indices, the Government inflation Index performed the strongest with a 0.80% return, followed by the Local Government Index’s return of 0.64%.

In April, the NZBond Indices all outperformed their Australian counterparts, similar to the previous month, except for the Supra Sovereign Index. The Composite Index, Treasury Index, Credit Index and Bank Bill Index and Inflation Index all delivered a higher return in NZ than in Australia.

Table 2. NZBond Total Return Performance: April 2016

Total Return Index Apr Mar QTD 12 MTH YTD 2 YR 4 YR NZBond Composite Index 0.31% 0.80% 0.31% 6.86% 3.69% 7.46% 3.99% NZBond Treasury Index 0.32% 0.85% 0.32% 7.07% 4.18% 7.73% 3.78% NZBond Local Govt Index 0.64% 0.84% 0.64% 7.08% 3.93% 7.88% 4.68% NZBond Non-Govt Index 0.23% 0.73% 0.23% 6.48% 2.85% 6.84% 4.50% NZBond SupraSov Index 0.16% 0.68% 0.16% 6.29% 2.80% 6.62% 3.71% NZBond Credit Index 0.31% 0.79% 0.31% 6.72% 2.91% 7.09% 5.19% NZBond Bank Bill Index 0.19% 0.23% 0.19% 3.08% 0.88% 3.35% 2.41% NZBond Govt Inflation Index 0.80% 1.69% 0.80% 2.32% 5.40% 7.53% 2.80% S&P/NZX 50 Gross Index 1.01% 8.37% 1.01% 17.77% 7.85% 14.17% 13.91% Source: Bloomberg Finance L.P. Note: 2 and 4 year returns are annualised.

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2.5% 2.0%

2.0% 1.4%

1.5% 1.4%

1.1%

1.0%

0.9%

0.8% 0.8%

1.0% 0.8%

0.6%

0.6% 0.3%

0.5% 0.3%

0.2%

0.1% 0.1%

0.0% Monthly Return (%) Return Monthly

-0.5%

0.0%

0.1%

0.3%

0.3% - -1.0% -

Monthly Retn Prior year comparison

Source: Bloomberg Finance L.P.

Chart 4. S&P/NZX50 Gross Index vs. Bloomberg NZBond Composite Index: Monthly Return Performance 2015/2016

10.0% 8.4%

8.0% 7.0%

6.0% 3.7%

4.0% 3.4%

1.9%

1.4%

1.1%

1.0% 1.0%

2.0% 0.9%

0.8%

0.6%

0.3%

0.2% 0.1% 0.0%

-2.0%

0.1%

0.3%

Monthly Return (%) Return Monthly

1.1% -

-4.0% 2.0%

2.4% -

-6.0%

4.5% -

NZBond Composite S&P/NZX 50

Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Global Market Performance

Among Bloomberg’s Global Sovereign Bonds Indices, Japan performed the strongest by returning 0.9% for the month. This followed the Japanese central bank’s decision against introducing further stimulus, contrary to broad market expectations. Australia and New Zealand performed relatively well compared to key global sovereign benchmarks by delivering a positive albeit modest returns. Singapore’s negative return reversed its strong 2.7% return from the previous month.

Chart 5. Bloomberg Indices Sovereign Debt Performance: April 2016

1.5%

1.0% 0.9%

0.5% 0.3% 0.1%

0.0% 0.1%

-0.5% 0.1%

- Monthly Return (%) Return Monthly

-1.0%

0.8%

- 1.1%

-1.5% - AUS NZ JPY HK SIN US EUR

Source: Bloomberg Finance L.P.

Investment-grade corporate bonds globally once again delivered positive returns in April. The US and UK continued to be relatively stronger performers, similar to March. Australia also delivered a relatively strong return and outperformed NZ.

Chart 6. Bloomberg Indices Investment-grade Corporate Indices: April 2016

1.5% 1.4%

1.0%

0.6% 0.5%

0.5%

0.3%

0.2% 0.1%

0.0% MTD(%) Return

-0.5%

-1.0% AUS NZ JPY UK US EUR

Source: Bloomberg Finance L.P. Page 9

Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Market Yields

In the Australian bond market, yield curves generally shifted lower in April. The Australian sovereign yield curve was relatively unchanged at the longer end of the curve but slightly lower towards the shorter end of the curve.

Generally, for Australian corporate issuers, yield curves have moved lower over the past month, particularly for less well-rated issuers. In comparison, on a 12-month basis, yield curves for corporate issuers have generally shifted up for less well-rated issuers and flattened for relatively stronger-rated issuers, while the Australian sovereign index is lower.

Among AusBond Indices, yields jumped in April for the inflation indices but fell for the remaining indices, thereby reversing the performance in March for non-inflation indices. Yields remain lower than a year ago for the Treasury and Semi Government Indices but are higher for the Credit Index and inflation indices.

Chart 7. Bloomberg AusBond Indices Bond Yields

4.00

3.50

3.00

2.50

2.00

1.50

Yield Maturity to Yield 1.00

0.50

0.00 Comp Treas Semi Supra Credit Infl Govt Infl Cred Infl Bank Bill

Feb-16 Mar-16 Apr-16 Apr-15

Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// In comparison, yields are lower than a year ago across all NZBond Indices. Yields had been steadily declining across the NZBond Indices since January 2016, but in April there were slight increases in the Composite, Treasury, SupraSov, Credit and Bank Bill indices.

Chart 8. Bloomberg NZBond Indices Bond Yields

4.50

4.00

3.50

3.00

2.50

2.00

1.50 Yield Maturity to Yield 1.00

0.50

0.00 Comp Treas Local Gov Supra Credit Infl Bank Bill

Feb-16 Mar-16 Apr-16 Apr-15

Source: Bloomberg Finance L.P.

Yields on global sovereign bond indices were mixed in April. Australia and NZ sovereign yields were steady. In comparison, yields for Japan and the Pacific Rim fell but rose for other key sovereign benchmarks. The yield for Singapore rose most notably, reversing some of the prior month’s significant drop in yield.

Chart 9. Bloomberg Indices Sovereign Bond Yields

3.50

3.00

2.50

2.00

1.50

1.00

Yield Maturity to Yield 0.50

0.00 AU NZ JPY HK SIN US EUR UK PACRIM -0.50

Feb-16 Mar-16 Apr-16 Apr-15

Source: Bloomberg Finance L.P. Page 11

Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Supply

New supply (issuances and taps) to the AusBond Composite Bond Index totalled A$14.19bn in April. This was 14.9% greater than the A$12.35bn added last April and 20.3% above the 12-month rolling average of A$11.79bn.

There were nine new issuances in April, which totalled A$3.49bn and formed 24.6% of the total new supply to the AusBond Composite Bond index during the month. In addition, there were 36 taps which totalled A$10.70bn. Treasuries formed the bulk (50%) of new supply, adding A$7.10bn, while A$3.83bn and A$3.26bn was attributable to the semi-government and non-government space respectively. Compared to March, treasury and semi- government issuances were largely unchanged by dollar volume but almost doubled in the non-government space.

New supply (issuances and taps) to the AusBond Credit FRN Index totalled A$7.35bn in April, following from the A$8.93bn added in March. The new supply was comprised of two new issuances totalling A$6.25m and eight taps totaling A$6.73bn.

The NZBond Composite Index added NZ$3.61bn through 11 transactions in April, about 260 percent greater than the NZ$1.38bn added in March. This was comprised of three new issuances totaling NZ$2.4bn and eight taps totaling NZ$1.21bn. Half of these additions (NZ$1.8bn) was attributable to two treasury transactions.

Table 3. Bloomberg AusBond Composite Bond Index supply: April 2016

Sector Apr Supply 12 mth avg % diff (A$bn) (A$bn) Treasury 7.1 7.1 .2% Semi Government 3.8 2.4 58% Non-Government 3.3 2.3 42.8% Total Composite 14.2 11.8 20.4% Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Maturities and Removals

Six securities with a combined face value of A$3.17bn left the AusBond Composite Bond Index for maturity reasons upon rebalancing for 1 May 2016.

Five securities with a combined face value of A$19.17bn will exit the AusBond Composite Bond Index for maturity reasons when rebalancing for 1 June 2016.

Table 4. Maturities for AusBond Composite Index: May 2016

Issuer ISIN Value Maturity

VICINITY HOLDINGS LTD AU3CB0162683 440,000,000 2-May-16 AUST & NZ BANKING GROUP AU000ANZHAM6 775,000,000 9-May-16 WESTPAC BANKING CORP AU000WBCHAV5 525,000,000 9-May-16 GAIF BOND ISSUER P/L AU3CB0176014 175,000,000 19-May-16 BNP PARIBAS AUSTRALIA AU3CB0176295 250,000,000 24-May-16 INTER-AMERICAN DEVEL BK AU300IADB049 1,000,000,000 25-May-16 Source: Bloomberg Finance L.P.

Table 5. Upcoming maturities for AusBond Composite Index

Issuer ISIN Value Maturity

ICPF FINANCE PTY LTD AU3CB0176865 250,000,000 3-Jun-16 DNB BOLIGKREDITT AS AU0000DBNHA1 600,000,000 8-Jun-16 WESTERN AUST TREAS CORP AU3SG0000474 1,719,688,700 8-Jun-16 BNZ INTL FUNDING/LONDON AU3CB0177673 700,000,000 14-Jun-16 AUSTRALIAN GOVERNMENT AU3TB0000077 15,899,950,000 15-Jun-16 Source: Bloomberg Finance L.P.

For the NZBond Composite Index, there will be one security exiting the NZBond Composite Bond Index for maturity reasons when rebalancing for 1 May 2016.

There will be no securities exiting the NZBond Composite Bond Index for maturity reasons when rebalancing for 1 June 2016.

Table 6. Maturities for NZBond Composite Index: May 2016

Issuer ISIN Value Maturity

INTL FINANCE CORP NZIFCDT004C0 500,000,000 25-May-16 Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Index Market Capitalisation

The AusBond Composite Bond Index ended April 2016 at A$881.59bn, a decrease of A$1.74bn (or 0.20%) from March 2016, which saw an earlier decline of A$31.46bn as well. The index remains up A$17.54bn (or 2.03%) since the beginning of the year.

The NZBond Composite Index stands at NZ$113.64bn, an increase of NZ$1.19m (or 1.06%) from March 2016.

Chart 10. Growth of Bloomberg AusBond Composite Bond Index: 2004 – 2016 YTD

1000.0 $881.6 900.0 $864.1 800.0 700.0

600.0 (A$bn) 500.0 400.0 300.0 200.0 100.0

0.0

2010 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 Apr-16

Source: Bloomberg Finance L.P.

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Month in Review 1 May 2016 /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

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