The strangeness of markets continued in August with US equity markets hitting all-time highs despite virus cases in the US climbing, although to be fair at a slower rate.
Government bond yields rose by a lot for this market, with both the US and Australian 10 year bonds up around 15bps in yield, which might not sound like much but when they started the month at 0.53% and 0.82% respectively the moves are put into more context.
Despite these low yields we have seen unprecedented demand for Australian government bonds, with record issuance and demand – a 10-year bond with a yield of 1% had $66bn of orders and ended up with $21bn being issued.
Indeed, new issuance was the theme for the month, with 11 bonds to our count coming to market that we participated in, all from domestic investment grade issuers. All of these were met with demand of at least double the amount issued, showing the huge interest in safe assets, albeit ones in some cases without much yield.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.40% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
In August we added the newly issued QBE 2026c subordinated bond in place of the Macquarie 2025c subordinated bond on account of its superior yield for the same rating, adding approximately 0.70% to that position.
With the QBE being the highest yielding investment grade issue for the month, we left the rest of the portfolio unchanged. Credit spreads have continued to grind lower over the month and as such the portfolio is a few bps lower in yield, although remaining well above 3%.
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 24% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 4.36% and is an approximate $600k spend.
In this portfolio we also swapped QBE for Macquarie as above, and also made the decision to switch one floating rate bond for another in the high yield portion of the portfolio, bringing in the unrated WorkPac Trust 2022 bond for AMP. We like the securitised structure of the trust that we lend to here and believe that the yield more than compensates for the risk, making the bond very good relative value in itself and compared to the AMP.
Workpac is also largely unaffected by the COVID pandemic, having a large exposure to the mining sector which has been deemed an essential industry.
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 17 bonds, yields 6.19% (not including the disco yield to call) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
As yields in US high yield continue to grind lower, we have taken out two of last month’s choices, while adding just one. This reduced the overall portfolio size, so we upped the allocations slightly (less than 1%) to each bond to keep the portfolio around the $500,000 level.
Emeco announced an equity raising and restructuring of their current bond holdings, with two large holders agreeing to extend the maturity by a further two years for a lower coupon with the proceeds of the equity raising being used to repay the remainder of the bonds at their call price.
This means the bonds will no longer be around in the public markets and as such we removed them from the portfolio. Well done to those clients that picked them up cheaply a month ago when we brought them into the portfolio.
Yields on Nufarm’s bond have benefited from the relatively resilient nature of the company’s business and have dipped under 5%. For a sub investment grade rated 2026 bond we feel this is a little tight and as such we have replaced this with the Rockpoint 7% 2023.
Recent results have been a little weaker than expected, resulting in some clients deciding to exit the bond. Given the dearth of other opportunities that fit the portfolio parameters we have decided to put it back in and would encourage both holders and prospective investors to take another look at this bond from both sides.
Other USD bonds we like:
As mentioned, there are other USD bonds we like that do not fit the parameters of this portfolio, but we thought it was important to make clients aware of them as they do have a place in portfolios. They are listed in the table below:
