The bond market has finally made the mainstream financial news, as the 10-year government bond yield has approached 2%.
With all market participants back after the long summer break, we saw an uptick in primary issuance, particularly in the investment grade space, which was welcome after the long seasonal hiatus.
The meaningful, and rapid, rise in risk free bond yields has been driven by a reflationary narrative in the face of truly monumental monetary and fiscal stimulus in response to the pandemic. Credit spreads have offset a lot of this move, broadly maintaining prices of most corporate bonds.
Yields still remain low in a historical context, and central banks are making no attempt to communicate any willingness to raise rates, so the next year or so will no doubt see the eventual winner in the battle between the market and the authorities.
We again made few changes to the portfolios, preferring to remain invested in the names we really like which continue to achieve the goals of capital stability and secure income.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 2.95% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
We made just the single change to the portfolio this month. The new bond issued by Charter Hall Long WALE REIT looked attractive, pricing with a 2.787% coupon.
We decided to add this longer bond in place of the Liberty 2024 floating rate note, given short term rates (which determine the floating rate coupons) are held at near zero by the RBA and the extra spread offered by the better rated but longer bond boosted portfolio income as well as improving the rating.
We kept the Queensland Treasury Corporation 2033 bond despite the risk of continued rate rises, as the 6.5% coupon provides a strong income stream and we believe it likely we can hold this very secure semi-government bond for some time yet without a meaningful deterioration in portfolio value.
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 3.61% and is an approximate $600k spend.
As above, given the Balanced portfolio is based off the Conservative portfolio, we changed only the Charter Hall position.
With the Sunland bond becoming available to retail investors and in effective wind down to the October 2022 call at 102, we will monitor this position with a view to changing it if the relative value becomes unattractive.
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 16 bonds, yields 5.49% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
We made one change to the High Yield portfolio this month, adding the Brookfield Property 2026 bond.
With a profile of Tier 1 US retail properties, similar in position to Scentre in Australia and New Zealand, a medium term maturity in 2026 and showing excellent relative value with a yield over 4.5%, we decided to add this bond to replace the Ford bond we removed last month.
This brings the portfolio to a yield of 5.49% which with cash rates at or near zero we still feel represents a genuinely high yield. We also note that some bonds we like, in particular the IAMGOLD 2028, are getting cheaper as we write, which improves our assessment of their relative value.
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.
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