Markets have been on a wild ride in April, with geopolitical risks and expectations of delayed interest rate cuts weighing on bond yields.
In the US, the consumer price index surprised to the upside for the third consecutive month; the adage that the last mile of inflation is the hardest to quell continues to be reinforced. It’s no wonder then that Fed Chair Powell commented that it would likely take longer than expected to achieve confidence that inflation is returning to target.
In Australia, the labour force report showed another solid result despite the unemployment rate ticking higher. On a trend basis, the Australian labour market has barely eased over the last six months and in a historical context, the labour market is still tight. The latest quarterly inflation data significantly surprised to the upside, which saw a major repricing of rate cut expectations. As it stands, markets have priced only a 27% chance of a rate cut by the end of the year.
This month, we added the Barclays 6.10% 2031 senior fixed rate notes to the retail menu, which was also included in the Sample Retail Portfolio at the expense of the Brisbane Airport 2030 notes. This was the only change made this month.
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. It is more skewed towards preserving capital rather than chasing yield, though yield is still an important consideration in the portfolio’s construction. It aims to have around 20 positions.
Most of the new additions have been skewed towards fixed rate notes in line with FIIG’s LOCK Strategy for 2024, which is about locking in higher yields and carefully preparing bond portfolios for the likely economic slowdown.
The bonds have an indicative weighted average yield of 5.90%* and the portfolio is an approximate $204k spend.
There was one change made to the retail portfolio this month. As noted above, we have added the Barclays 6.10% 2031 Senior bond to the list of retail eligible securities and included it in the sample portfolio. We removed the Brisbane Airport 2030 bond. Barclays is a UK universal bank with operations across retail, commercial, and investment banking. The reason for the change to the portfolio was Barclay’s higher yield and credit rating (one notch), while maintaining a similar tenor profile. We do note that the total portfolio exposure to the financial sector has increased as a result of this change.
The running yield of the portfolio remains a fairly strong 5.90%. Finding high yielding options in the current environment is becoming more difficult as markets price in rate cuts this year and next. However, continuing to lock in higher yielding bonds 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.