The US government shutdown ceased in November and some of the data released showed a weakening employment picture. Pricing for a rate cut at the meeting next week has firmed to nearly 100%.
It couldn’t be more different domestically. Strong jobs numbers followed by a strong (first-time complete) monthly CPI number have basically removed all pricing for rate cuts in Australia for the foreseeable future.
Indeed, market commentators are now discussing whether the RBA will have to raise rates in 2026, particularly if the AI investment boom takes up the small amount of spare capacity in the economy and therefore pushes up inflation.
Fiscal measures are probably the more effective in this scenario, but no government globally seems to have any desire to curb spending.
Watch this space.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.85% and consists of ten bonds of roughly equal weight by value to total an approximate $510k spend.
There were two more new issues in November that FIIG participated in in a large way from the public markets.
With yields rising as a result of the above data, we decided, in true Moneyball style, to switch out the longer duration EDF 2045 bond which was still trading above par and replicate its higher yield in aggregate rather than in a single exposure.
BNP Paribas followed the very successful debut of UBS in the OTC AUD AT1 market and issued $750m of a 5½ year bond at 7%. This was the largest ever allocation for a public market bond in FIIG’s history.
Secondly, Transgrid, the NSW electricity utility, priced a 10-year subordinated bond at 6.29%. Both were rated BBB-, so although one notch lower than EDF’s BBB rating we prefer to take the minimal increase in credit risk to reduce the interest rate risk by over half.
To fit in the second new bond we removed the AGL bond, as it is also in the Utilities sector, for a yield uptick from the same one notch ratings downtick.
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 33% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 6.43% and is an approximate $585k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative portfolio.
We made the two investment grade switches as above.
In great news for the high yield market there was another new bond issued in the month from previous FIIG issuer Zagga.
They rolled over their maturing 4-year fixed rate bond into a new 4-year floating rate bond, which is further good news for the market given there is a dearth of floating rate high yield options now that the RMBS market is effectively closed given the lack of availability.
Three times the size compared to when they issued the inaugural bond and yet paying almost the same margin, this looks like very good relative value.
We switched out the Judo bond as the lowest yielding sub investment grade bond in the portfolio as the aim of the high yield portion of the portfolio is after all to generate a high yield.
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 6.96% and is an approximate $525k spend, demonstrating the concept of greater diversity in higher risk positions.
Deutsche Bank noted earlier this week that Emeco had raised $350m from a bank term loan that will be used to pay off their July 2026 bond. As such, with the lowest combination of yield and income to the maturity date and knowing that the bond can be called any time at par, we switched this one out for the new Zagga bond mentioned above.
No further change to the available high yield bonds meant no further changes. We are hopeful to make another USD bond available next month and also include the listed new issue from Stonepeak after it settles in December.
We also adjusted face values on RACE and WA Stockwell to account for the amortisation.
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