We have seen a continuing divergence in risk and safe haven markets over July, with US equities and in particular tech stocks continuing to make new all-time highs, while government bond yields plumb all time lows, sending the opposite signal. Perhaps this is just a sign of the unlimited liquidity sloshing around markets, but the conflicting messages are worth watching, as the economic data continues to point to a decidedly non-V-shaped recovery.
Google priced a range of new corporate bonds with the lowest corporate yields in history this week, and we also saw the weight of money driving local yields down, with AusGrid pricing a 6½ year bond at a yield of just 1.81% and the Commonwealth issuing $15bn of 30 year bonds at a yield of 1.95% from an order book of over $36bn.
Yields across the board have come down as more cash seeks fewer available bonds, and in light of this we are taking a cautious stance and maintaining exposure, particularly in the High Yield portfolio, to credits which have a limited or no impact from the COVID-19 pandemic.
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.52% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
In July we swapped out the AMP subordinated bond post its downgrade one notch to a sub investment grade rating (to comply with the mandate of all investment grade rated bonds), bringing back in the Pacific National 2029 fixed rate bond, which has had its own investment grade rating affirmed by S&P, along with confirmation that the company is deemed an essential service and has seen limited effects of the COVID-19 virus. This lowered the yield on offer marginally.
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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 4.40% and is an approximate $600k spend.
In this portfolio we also swapped AMP for Pacific National as above, moving it to a 4% allocation in line with its new sub investment grade rating. We don’t have any concerns over repayment so it looks good value considering the credit strength when judged against high yield peers.
The StockCo bond has an approaching call date which is capping the yield so we have replaced that bond with the Sunland 2024, as the company has been realising good profits with recent asset sales and continues to maintain a strong balance sheet.
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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 5.92% (not including the disco yield to call) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
In USD we have recently come across more supply in the Emeco 2022 fixed rate bond. With gold hitting recent all time highs and substantial capex coming, we decided to rotate out of IAMGOLD 2025 into the Emeco bond, which looks attractive to maturity as well as having the potential to be repaid early at a good yield to call, as Emeco was looking to refinance into an AUD bond prior to the COVID pandemic breaking out.
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