The last month saw a fairly significant paring back of market pricing as the US Federal Reserve appears to have convinced traders that there won’t be as many rate cuts as previously thought. Higher than expected consumer price inflation was the first catalyst before it was reinforced by higher producer prices and other strong economic data. If the US economy remains in a strong position, there should be no rush to cut interest rates.
It was a historic month for the RBA, which undertook its first policy meeting under the new format including a two-day meeting and post-meeting press conference. The board did consider raising rates in February and mentioned that a further increase in interest rates cannot be ruled out. But it does not appear to have given that serious consideration, and rates were kept on hold given the falls in inflation over prior months had been larger than expected. Although there are some emerging signs of weakness in the Australian economy (the unemployment rate hit 4.1% in January), risks still remain about the inflation outlook.
This month, we added the ANZ 6.736% Tier 2 fixed rate notes to the retail menu, which was also included in the Sample Retail Portfolio.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and selective higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield. It aims to have around 20 positions.
We previously had some positions that were much larger than the minimum size of AUD10k. This year’s strategy is to reduce those excess positions and replace them with new bonds to improve diversification. Most of the new additions were skewed towards fixed rate notes in line with FIIG’s LOCK Strategy for 2024, which is about locking in higher yields.
The portfolio yields an indicative 5.76%* to the assumed maturity dates and is an approximate $200k spend.
There was one change made to the retail portfolio this month, as we added a new ANZ fixed rate offering stated above and removed the Tier 2 notes from the Bank of Queensland. The rationale for exiting BOQ and replacing it with an issuer from the same sector was that it offered a higher yielding option.
The running yield of the portfolio remains a fairly strong 5.76%. Finding high yielding options in the current environment is becoming more difficult as markets price in rate cuts this year. However, locking in higher yielding bonds now before rate cuts eventuate is a good strategy.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
*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.