Over May yields were pretty volatile, based more often than not on the news flow around the evolving tariff situation rather than the data, which has been mixed, further muddying the waters. The US and China did a delaying deal and then the US and the EU did similar.
Equities loved the good news around the delays and had a very strong May, with the S&P500 having its best May since 1990!
Time will of course tell, but one thing is clear – we have moved from no tariffs to 10% minimum tariffs being seen as a huge win. Salesmanship (call it what you will) of the highest order. Daniel Kahneman would be applauding from his grave with all the anchoring...
There has been a huge number of new issues. We picked the ones we liked and client interest was strong in all of them. Investment grade subordinated bonds were the order of the day, with Aurizon, Mystate Bank, Heritage Bank, Macquarie, QBE and Westpac all getting in on the action, as well as Worley finally issuing their 7 year senior bond.
We would have to upend the portfolios entirely to make room for them all, so we have picked and chosen only the best for inclusion.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.64% and consists of ten bonds of roughly equal weight by value to total an approximate $515k spend.
Firstly, the floating rate bonds. These are all about the trading margin, and Aurizon’s inaugural May 2030c subordinated corporate bond issued with a very attractive 2.80% over the BBSW rate. This is about 0.55% better than the Liberty 2030 so we swapped those out, improving yield for a similar maturity and just one notch lower rating.
For the fixed rate bonds, we very much liked the new WBC and Macquarie subordinated 10-year fixed rate options. The interest rate curve has steepened a fair bit so these longer bonds look more attractive than they have for a while.
The Scentre 2030c bond is good but for an extra notch in rating and a longer tenor with a higher coupon, it didn’t stack up against the Macquarie.
We are always cautious about overweighting the financial sector given they are the majority of issuance, and so we resisted the temptation to also add the WBC 10-year fixed rate.
The duration of the portfolio is 4.6 years which is higher than it has been for a while but we still need to manage risk, so I expect we will keep it here or thereabouts for a while.
BPCE priced a new 10-year bond that looks attractive on Tuesday 3rd June which may well make it in next month.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while 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 27% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 6.27% and is an approximate $625k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
Mystate Bank issued a high yield floating rate subordinated note but at a margin of +2.53% it isn’t enough to make the move into the high yield portion of the portfolio.
In the investment grade section we made the same two changes as above.
Credit spreads were marginally tighter on the month which offset the slight rise in base yields, leaving the portfolio as a whole yielding about the same as last month.
We would like some good high yield to enhance the yield of the portfolio again, although to be fair the hurdle is about 8% to get in…
High-Yield portfolio:
The High Yield portfolio looks to generate a higher 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 7.27% and is an approximate $530k spend, demonstrating the concept of greater diversity in higher risk positions.
No new bonds to choose from this month unfortunately but as usual we are quite happy picking up the income from the portfolio, which is running at a very nice 8.12%.
Spreads have come back in as the tariff volatility has subsided and the yield of the portfolio has fallen as a result.
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