All eyes are firmly focused on the US presidential election which will likely have most voting completed by the time you read this... Will there be a conclusive outcome? Who knows?
This uncertainty has seen volatility continue to rise in equity markets with the VIX index approaching 40 (approximating to an expected 2.6% daily move), and last week the gloss coming off tech stocks once more.
US bond yields also rose fairly substantially over the month, now resting just above 0.80% for the 10 year. With the Australian 10 year bond having stayed basically unchanged over October, the US bond now yields more than our local one. With this spread being one of the most correlated to the AUDUSD exchange rate, it seems a little strange to have the Aussie battler staying above 70c, but maybe record iron ore prices and our strong comparative virus response (as well as that of China’s if you believe their data) are keeping speculative confidence in our currency high.
New issuance has been active, but less so than in September. As such, we continue to like more or less the same cohort of bonds in the portfolios. The RBA has made the final move towards zero in short term rates, and so we would hope to see the longer end of the rate curve perform from here as they target that area to keep a lid on yields to provide yet more monetary stimulus.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.13% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
The primary issuance in the month had a few interesting options, but only one that we considered good enough value to replace any of the bonds in the current portfolio.
LendLease issued a 7 year green bond at a fixed coupon of 3.40%. Being an investment grade rated bond, relatively short at 7 years and also with the added incentive of a green certification, we thought this was great value at issue and is still good value at 3% yield to maturity.
We swapped out the QBE 2025 callable floating rate note (FRN) which while still good value for an investment grade FRN in this market wasn’t quite as good as the LendLease. In addition, the portfolio is overweight floating rate notes, so it was a good opportunity to add some fixed rate to the portfolio to try and pick up some capital upside with yields trending down.
With the shortage of green issues that have good value yields, we expect this one to keep performing in a capital sense, in addition to the general lowering of yields we expect due to the RBA’s intervention.
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 4.21% and is an approximate $600k spend.
We swapped the QBE for LendLease as above, and as the price on the ZipMoney 2017-1 B note has improved to just over par, bringing its yield down to around 4.5% (being so short as it matures in May 2021, a small move in capital price means a large move in yield) we decided to bring in the WA Stockwell 7.00% 2026 fixed rate bond.
Senior Secured and with a large exposure to the main shopping centre in Noosa, as well as development land surrounding the site, we feel this bond looks cheap for the risk as Noosa (and by extension its shopping centre) should benefit from the regionalising of the workplace away from main cities due to COVID.
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 6.12% (not including the disco yield to call – this increases to 7.57% if they are called as anticipated) and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
The only change to the portfolio this month was the swapping of the ZipMoney bond for the WA Stockwell as above.
We considered taking the discos out of the portfolio given their strong capital performance in October, mainly driven by a European regulator paper describing their desire that these kinds of legacy instruments be removed from capital structures before they lose their capital treatment – which is the exact rationale for this trade.
All discos in the market saw a rally, although we note that the European regulations are not always in line with ours domestically. However, with the ongoing international standardisation of these kinds of regulations (such as Basel III), we still think it is likely that APRA will share the European view.
However, the dearth of USD options available meant we kept them in for this month. If we are able to secure supply of the newly issued IAMGOLD bond which replaced the previous one we liked then we will likely include that next month.
Other USD bonds we like:
The table below continues to show other USD bonds we like that don’t fit the parameters of this particular portfolio.
