There were some signs throughout May that economies are beginning to slow gradually, not sharply. Although this flies in the face of many central banks who recently stated that rate rises are possible if inflation does not decelerate as quickly as expected, this situation seems unlikely unless there are any drastic upward surprises in the data.
At the beginning of May, the RBA left rates on hold and were more hawkish than they were at their previous meeting in March. But since that meeting, Australian unemployment and wages data, plus measures of business conditions, have come in weaker than markets were expecting. It should be pointed out that all three of these indices are still strong in a historical sense, but the direction of travel is starting to reverse.
Similar themes were seen in the US. Members of the FOMC said that it would take longer than previously anticipated to gain confidence that inflation was moving towards the board’s target. But pleasingly from an inflation perspective, all four measures of consumer prices for April came in lower than the previous month, which appeared to assuage fears that inflation was becoming entrenched. Additionally, retail sales were drastically softer than expected. This saw a rise in equity prices and falls in bond yields for most of May.
This month, we added the AusNet 6.134% 2033 senior fixed rate notes to the retail menu but left it out of the Sample Retail Portfolio for May on account of there already being an AusNet bond included.
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.
The bonds have an indicative weighted average yield of 5.86%* and the portfolio is an approximate $204k spend.
There was one change made to the retail portfolio this month, where we added the NAB 4.95% 2029c AT1 bond and removed the ANZ 6.405% 2029c Tier 2 notes. This switch was done purely on a yield basis; both NAB and ANZ are major Australian banks and have the same credit rating, while the specific bonds themselves had the same call date. This can partly be explained by the position in the capital structure. AT1 bonds rank lower than Tier 2 notes, so are considered riskier, and therefore should be compensated for taking on that additional risk.
The running yield of the portfolio for May was approximately 5.86%. High yielding options in the current environment are proving more challenging to find as markets price in rate cuts, and for bonds remains elevated (i.e. all else equal, bond prices will move higher which pushes yields lower). However, continuing to lock in higher yielding bonds before rate cuts eventuate is a good strategy, but we also expect diversification to play an important role in the coming months.
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.