The month of June has seen an overall consolidation in bond markets. Yields have broadly been stable, with US and Australian 10-year government yields unchanged for the month.
The primary market globally has been very strong, in particular in investment grade bonds, with volumes year-to-date surpassing the total for 2019.
Locally the market also woke up in May and June, with the last month seeing some attractive deals that we participated in strongly, namely Brisbane Airport ($600m 10-year senior secured at 4.50%) and Genworth ($190m 10-year/non-call 5-year Tier 2 at BBSW +5.00%). Both names are included in the portfolios below as we believe they offer strong relative value.
Conservative portfolio
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.75% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
For this month we swapped out the IAG 2024c Tier 2 bond for the new Genworth Tier 2 as above, almost doubling the expected yield for just a 1-year extension in tenor and a 1 notch lower credit rating. We also swapped the Pacific National 2029 fixed rate bond for the new 2030 Brisbane Airport, lifting the yield by 0.40% and improving the credit rating by 1 notch.
Balanced portfolio
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have between 15-20 positions, with the high yielding bonds in smaller parcel sizes (comprising 25% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 4.66% and is an approximate $600k spend.
We did the same swap as in the Conservative portfolio for Pacific National into Brisbane Airport, and also switched AroundTown 2025 for the Genworth bond, keeping the 2025 tenor but lifting the yield by 2.5%.
In the high yielding portion of the portfolio we removed the short dated Next DC bond as its price had improved and therefore didn’t yield enough in our opinion, replacing it with the ZIP Money 2017-1 B floating rate note, with a maturity in May 2021. For the same tenor, and both being unrated, the Zip bond has a yield 5% higher, which we believe is excellent value.
High Yield portfolio
The High Yield portfolio looks to generate a high yield while still looking to have a bias towards as low risk positions as possible.
This is achieved by good diversification and attempting to identify fundamentally mispriced bonds.
The current portfolio has 18 bonds, yields 6.29% (not including the disco yield to call) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
There are 2 investment grade rated bonds in the portfolio – the deeply discounted securities or “discos”. They are low priced subordinated bonds issued by the major banks in the mid 1980’s.
There is a likelihood they will be redeemed early by the banks just prior to or after January 2022 as their regulatory capital treatment changes. If called at these dates, they will yield more than 20% to the call date.
Assuming this yield to call eventuates, the portfolio would yield 8.55%.
We made no changes to the high yield portfolio this month, being comfortable with the current holdings.
The outlook on Hunt Cos. Inc's rating has been changed to negative, pointing to a potential risk of downgrade so we will continue to monitor this position.
The portfolios can be viewed here.