Wednesday 19 July 2023 by Jessica Rusit a beach in australia Trade opportunities

Retail Sample Portfolio Update – July 2023

Market volatility was relatively absent over the month, although yields continued higher on expected future hikes from the Reserve Bank of Australia (RBA). With a 95% allocation of investment grade bonds, the Sample Retail Portfolio now yields 6.53%*. Here we discuss the changes made to the Sample Retail Portfolio for the month of July.

Retail Update

Moves in rates largely dominated markets last month, following a hawkish RBA June meeting, although the central bank kept rates on hold for July. Markets are widely expecting it to be a short- lived pause with further rate hikes priced in for August and September.

With yields up over the month, attractive yields on investment grade bonds are for the taking, and the Sample Retail Portfolio jumped to a yield of 6.53%*. This was also aided by changes we made to the portfolio, with a new Macquarie Tier 2 subordinated fixed and floating rate note added to the retail menu, as per below:

  • Macquarie Bank-BBSW+2.70%-7Jun27c Tier 2 subordinated notes
  • Macquarie Bank- 6.082%- 7Jun27c Tier 2 subordinated notes

Retail Sample Portfolio

The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and selective higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.

It aims to have around 10 positions, with the higher yielding bonds in smaller parcel sizes to reflect their assumed higher risk. Currently the portfolio holds 14 bonds, which provides better diversification.

The portfolio yields an indicative 6.53%* to the assumed maturity dates and is an approximate $205k spend.

The Macquarie Bank 2027c notes are now retail available, and being issued late last year when rates were higher, provider higher cash flows for portfolios. With this in mind, we added in the 2027c floating rate note, which pays a margin of 2.70% over the 3M Bank Bill Swap Rate (BBSW). It’s currently paying a coupon of 6.879% for the quarter.

To make room, we exited the Bank of Queensland 2027c floating rate notes, while keeping the same tenor and instrument type. The Bank of Queensland 2027c notes pay a margin of 1.75% over the 3M BBSW, which is currently a coupon of 5.679% compared to the higher Macquarie coupon.

We also reduced our holding while executing the switch, moving from $20K face value, into $10K face value, which has reduced our floating rate exposure slightly. This is with the view rate hikes are mostly priced in and we favour locking in returns on offer from fixed rate bonds, which is now a larger allocation in the portfolio.

The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.

*Please note the indicative yield shown is the expected yield to the assumed maturity/call dates of the bonds included in the portfolio, based on swaps rates at the time of writing.