In the spirit of the upcoming Olympic Games, two major central banks are currently on the podium in the rate cutting event and a third looks set to join them in the coming months. Unfortunately, Australia does not appear to be one of them.
During June, the Bank of Canada and European Central Bank cut their respective cash rate by 25bp, with the BoC seemingly inclined to cut again, but the ECB more circumspect. The market believes the Bank of England will take bronze in August, pipping the US on account of a still resilient economy (albeit marginally slowing) and concerns about inflation (although there have been two / three consecutive months of encouraging data). So why is Australia unlikely to take home a medal (we’re sure they will in sporting events, but in the rate cut “race”, this appears unlikely).
The RBA kept rates on hold at its June meeting, but the board is slowly being wedged between a rock and a hard place. The persistence of inflation and upcoming budget measures are increasing the pressure to raise rates. However, as strange as it may be, they are also relatively closer to cutting them than generally understood as well as economic growth and the labour market is softening. Another rate rise may result in a hard landing, but keeping rates on hold may see inflation linger for longer. There’s a great deal of uncertainty about the trajectory at the moment; no wonder central bankers rely on the data.
This month, we added the Judo Bank 2028c Tier 2 floating rate notes to the retail menu and have also included it in the Sample Portfolio. We also made one other change to the Portfolio this month, which we explore further below.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio whereby we aim to weigh an appropriate level of risk and return. It is more skewed towards preserving capital rather than chasing yield, and hence the higher weighting to investment grade credit, 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 5.85%* and the Portfolio is an approximate $205k spend.
This month, two changes were made: we added the Judo Bank Tier 2 floating rate notes, with a call date in 2028, and the ClearView subordinated bond which is callable in 2025. We removed the Emeco Senior 2026 and the Queensland Treasury Corporation 2033 notes. The Judo bond was added given its oversight from APRA, one of the most conservative banking regulators in the world (which would serve well in the event of a stress event). The ClearView bond was added not just on a yield basis, but also on account of its solid recent financial results. Also, the close call date serves to limit the downside to any potential issues, all else being equal.
The running yield of the portfolio for May was approximately 5.85%. This has been similar to previous months, but bonds with attractive yields and relatively low credit risk are becoming more difficult to source. Risk-free rates (i.e. the yields on government bonds) are falling, and credit spreads (i.e. the difference in yield between a corporate bond and government bond) are tightening. While some higher-yielding options are still available, they are more associated with higher risk issuers. It is therefore a worthwhile strategy to lock in bonds from respectable issuers at rates which will provide a steady income stream. 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.