It has been a quieter month in November after the market digested a huge month for Tier 2 issuance in October. We did see one interesting deal from Air Services Australia, the entity that controls the air traffic control for Australia, and essentially seen as government risk given its AAA rating.
We bid in the primary market for bonds and had a good allocation, but it is too conservative for our portfolios given the lower yield that comes along with such a high rating.
Yields in general are lower, as the market reprices lower the terminal rates of various central banks globally and headline inflation measures look to ease slightly from previous highs.
Indeed, the monthly CPI figure for October was released yesterday and came in well below expectations at 6.9% YoY vs consensus of 7.6%, although the Reserve Bank of Australia (RBA) doesn’t place too much weight on the new monthly series yet as it does not include all data that the full quarterly set does.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.11% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
We cautiously add a little duration to the portfolio as longer dated government bonds have eased from recent highs and point to the relentless march higher in yields of the last 12 months receding.
As recession concerns grow over the ability of the economy to cope with these new higher rates, longer dated bonds should perform if these fears do come to fruition.
The portfolio is already 50% fixed rate, so we didn’t want to add to that allocation, instead switching the Pacific National 2027 bond for a longer dated 2031 maturity from Lendlease. Trading at a materially lower capital price around 82, yielding almost 0.70% more and with the same BBB- rating, and a green certification to boot, we like the characteristics of this new addition to the portfolio.
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 38% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 7.07% and is an approximate $580k spend.
Given the good value identified in the Lendlease 2031 bond for the Conservative portfolio, we also include it in the Balanced.
Again, not wanting to hugely increase the duration we switched out the Qantas 2030 bond for a pickup in yield of approximately 0.40%, and the green certification is also of value in comparison here.
No changes to the high yield portion of the portfolio this month – still keeping an eye on the relative value compared to available investment grade bonds.
High Yield portfolio:
The High Yield portfolio looks to generate a high 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 16 bonds, yields 9.32% and is an approximate $515k spend, demonstrating the concept of greater diversity in higher risk positions.
The Evolve 2025 bonds has been called early and will be repaid on the 4th of December. Whilst we evaluate available supply, we simply remove this bond from the portfolio until something compelling comes along that demands inclusion in the portfolio.
As we commented last month about the balanced portfolio, the beauty of bonds is that they continue to tick along paying income even with no activity, and the income from this portfolio is very strong indeed.
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