It’s been a busy month in the Retail space with five new bonds added to the menu and higher yields on offer with the rates outlook. The portfolio now yields 6.28%* with yield moves and changes we made for the month. Here we provide an update for October.
Yields were a bit more volatile over the month but generally continued to trend higher with little news flow to anchor them. This was also supported by a hawkish Reserve Bank of Australia (RBA) when the Board met at the end of September, raising the cash rate by 25 basis points (bps) to 4.60%, as widely expected. However, what was of note though for markets, were comments from RBA Governor Michele Bullock, who indicated that further rate hikes were possible if inflation risks persisted.
With persistent inflation and cost-of-living pressures, bonds continue to provide a regular cash flow, of which some of the new bonds added to the Retail offering have a running yield over 6.00%. This improved income stream supplements the floating rate allocation in portfolios, which is also resetting at a higher quarterly coupon rate as the 3month Bank Bill Swap Rate (BBSW) trends higher. While the new bonds added were all fixed rate, diversification in portfolios is key and floating rate notes are also important to balance out these fixed positions.
We added the below new bonds to the retail product offering for the month, all of which are rated investment grade by (both or either) S&P Global/ Moody’s:
- AGL Energy senior unsecured bond, with a Sep 2035 maturity and paying a 5.77% coupon rate - Utilities sector
- Coles senior unsecured bond, with a Nov 2033 maturity and paying a 6.208% coupon rate - Consumer staples sector
- QPH Finance (Port of Brisbane) senior secured bond, with a Mar 2035 maturity and paying a 5.695% coupon rate - Industrials sector
- Scentre Group senior unsecured bond, with a Sep 2035 maturity and paying a 5.35% coupon rate - Australian REIT sector
- Sydney Airport senior secured bond, with an Apr 2034 maturity and paying a 5.90% coupon rate - Infrastructure sector
With upcoming redemptions into year end, this expands the current reinvestment options for noteholders, while also offering attractive yields, running yields and sector diversification for retail portfolios. Here we provide an update on the Sample Retail Portfolio for the month of October.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, designed to offer an appropriate level of risk with return. Overall, it remains more skewed towards preserving capital rather than chasing yield.
The portfolio is expected to yield around 6.28%* to maturity for the month, with 15 bonds and has approximately AUD206k invested.
We were spoilt for choice for the month with the additions of new retail bonds but decided on including the AGL Energy 2035 senior unsecured bond to the portfolio for its higher yield (at time of writing, around 6.50%) and attractive running yield (at time of writing, around 6.07%). We also liked the more defensive utilities sector, which is generally more resilient in times of macroeconomic weakness.
To make room for this, we exited our $20k holding of the Qantas 2034 senior unsecured fixed rate bond, of which we have no credit concerns with Qantas, but could improve the yield by switching.
We only switched $10k into the new bond and topped up our existing Australian Gas Infrastructure (AGI) floating rate note holding, wanting to ensure we balanced our fixed positions with some floating rate given the rates outlook.
In making these adjustments, we achieved an attractive portfolio projected return of 6.28% to the assumed maturity date, while managing the portfolios duration.
The Sample Retail Portfolio, along with the full list of retail available bonds, can be found on the FIIG Website here. Factsheets are also available via MyFIIG.
*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.