The Reserve Bank of Australia (RBA) indeed delivered on their promise of raising rates if the economy got too hot, which the December jobs report and quarterly CPI showed it had. With unemployment now back near the lows and CPI well above target, the rate hike was no surprise.
The speed of the shift in view was surprising though, with cuts being discussed in November and now a hike delivered in February.
The 10-year yield has risen 0.70% from the mid-October lows to now, which is great for future investors as yields push back above 6% for new issues, but no so good for investors who bought bonds prior to the turnaround.
Government spending seems to be the main driver of the lack of capacity in the economy with productivity growth almost zero leaving no room for any private sector growth.
You would think the government would want to let the private sector grow the economy at a reasonable pace but maybe that’s wishful thinking.
The primary market has started the year at the same frenetic pace it finished 2025, with several new issues to make us re-examine the portfolios for value.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.95% and consists of ten bonds of roughly equal weight by value to total an approximate $510k spend.
The January (and early Feb) new issue deluge was mainly targeted at the very highly rated end of the market, with yields too low for inclusion in our portfolios.
However, there were three that got our attention – all subordinated bonds from highly rated issuers at the senior level.
We had WBC issuing the first Tier 2 subordinated domestic major bank bond of the year at over 6% and French bank, Credit Agricole following suit at 6.45%, both with 10 year to first call fixed rate issues.
Victorian regulated electricity company AusNet round out the trio with a similar 10-year to first call fixed and floating bond. The fixed rate was attractive, but we have a dearth of good value floating rate issues, so we decided to include the floating here replacing the IAG 2033.
This minimises the extension of credit spread duration, although we are dropping three notches in credit rating at the same time but being paid for the increase in risk. The regulated nature of AusNet’s earnings gives us comfort to add this incremental risk.
To add the WBC and Agricole we exited the Transgrid 2035c and BPCE 2035c – this manages both the duration and credit exposure to domestic electricity businesses and French banks, whilst improving the credit ratings on both issues (which compensates for the IAG to AusNet above).
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 6.49% and is an approximate $585k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative portfolio.
This portfolio did not hold the IAG floating rate note that the Conservative did, so we decided to not add the WBC subordinated bond as the lower yielding of the three new options.
Instead we switched out like for like with Ausnet replacing Transgrid and Agricole replacing BPCE, to keep the credit exposures broadly the same.
Bearing in mind this portfolio also has less floating exposure than the Conservative, we added the AusNet floating rate note for the Transgrid fixed so we can also manage the interest rate risk of the portfolio in light of the changing rates environment.
With so many new bonds being issued we get the chance to revisit this balance each month with new bonds which is a good position to be 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 7.05% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
No new high yield bonds were issued despite the flurry of investment grade issues.
Despite this we have found a new USD bond from existing issuer SBL Holdings, a Kansas-based annuities and pension product provider.
When we first introduced the SCOR USD bond to this portfolio, despite being rated BBB+ it had a yield approaching 7%. Now this is below 6%.
SBL is rated BBB-, so is still investment grade, but yields well over 7%.
Therefore, just on a yield basis we switched one for the other, as we don’t want to increase the allocation to USD despite its weakening in 2025 of ~10% vs the AUD.
Currency diversification is generally a good thing, but when you sacrifice yield then it ceases to be good value. As such we will switch out the Nationwide GBP bond, which after another rally in price now yields less than 6%.
In its place we put the new Stonepeak infrastructure bond that settled in December, which yields 7.55%.
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