There were a number of central bank meetings throughout March and despite the “insanity” that can come from them, they are important events as they provide valuable insights into member’s thoughts about the path of interest rates.
We mention the word insanity because sometimes, the interpretation of the messages stated in the post-meeting release and press conference result in a wide range of forecasts. What one thinks is a dovish response, another believes is hawkish. And this “centre” is where central banks appear to be sitting at the moment; not hawkish, not dovish, but unsure, as the direction of their respective economies remains unknown. This was true in the case of the latest decisions from the RBA and FOMC (the committee in the US).
The RBA left the cash rate unchanged and caused a stir by removing the direct reference to rate hikes in the post-meeting statement. The initial market response was one of celebration, but others believe that it’s not time to pop the cork just yet. There remains a great level of uncertainty about inflation, labour markets, wages, and economic growth.
As such, the current setting is more neutral in nature, and it is therefore difficult to justify as a case for rate cuts at the moment (even though we are creeping towards that stage). It depends on how quickly the economy is slowing and based on the latest employment data (which fell from 4.1% to 3.7%), the timing of the first rate cut may be further away.
In the US, the FOMC also left rates on hold and remained firm as it noted that inflation was still elevated, and unemployment had remained low. The committee still wants to gain greater confidence that inflation is falling sustainably to its target, but markets were jovial following the result.
In short, policymakers expect to cut rates by around 75bp this year (which was the same number indicated in the December 2023 forecasts). The fact that it remained the same, even though US inflation has ticked higher over the last two months, was interpreted as dovish. Additionally, Chair Powell commented that recent higher inflation prints haven’t changed the overall story that inflation is still declining (although this remains to be seen). On the other hand, projections for GDP growth and inflation were revised upward for 2024.
This month, we added the CBA 6.704% 2033c Tier 2 fixed rate notes to the retail menu, which was also included in the Sample Retail Portfolio. This was one of two changes made this month.
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. It is skewed towards preserving capital rather than chasing yield and aims to have around 20 positions.
This year’s strategy is to replace large, single-name exposures with a wider variety of bonds to improve diversification. Most of the new additions have been skewed towards fixed rate notes in line with FIIG’s LOCK Strategy for 2024, which is about locking in higher yields and carefully preparing bond portfolios for the likely economic slowdown.
The bonds have an indicative weighted average yield of 5.75%* and the portfolio is an approximate $204k spend.
There were two changes made to the retail portfolio this month. The first was a same issuer switch, replacing the previous Commonwealth Bank of Australia (CBA) fixed rate note (with a call date in 2027) with the CBA bond mentioned above. The rationale for this was purely based on yield; the recently added CBA notes, with a 6.704% coupon rate, currently have a higher yield on account of its longer call date. We also replaced the floating rate note issued by NAB with the Pacific National notes maturing in 2029 (paying a fixed rate coupon of 3.70%). This was done for further sector diversification, and also because of yield.
The running yield of the portfolio remains a fairly strong 5.75%. Finding high yielding options in the current environment is becoming more difficult as markets price in rate cuts this year and next. However, continuing to lock in higher yielding bonds before rate cuts eventuate is a good strategy.
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.