Markets are forever moving and changing, and it is easy to forget what happened the previous day, let alone last month. Quite a lot happened throughout July and the start of August: the Olympics started with a bang following a volatile election in France, President Biden withdrew from the Presidential race, and economic data reinforced market expectations of rate cuts, or in some cases, a longer hold. In the spirit of the Games, we previously noted that Canada took gold in the major central bank “rate cut race” and last month, cut its benchmark cash rate again. The Bank of England took bronze, though it was a very close call in the end.
In the US, the FOMC left rates unchanged at its meeting in July and Chair Powell noted that a reduction of the policy rate could occur as soon as September. However, market activity in early August raised speculation that the Fed would be forced into an emergency rate cut following weaker than expected labour force data. It turned out this was an overreaction, and a cut in September is seemingly likely due to the encouraging inflation numbers.
In Australia, there was a bit to celebrate with the monthly inflation data coming in slightly lower than feared, though in absolute terms, it is still far too high, and the RBA is unlikely to cut rates any time soon. This was also boosted by solid retail sales and employment data.
This month, we added the QBE Insurance Group 2029c Tier 2 floating rate notes to the retail menu, though we did not add it to the Sample Portfolio on account of its slightly lower yield compared to other names. We still believe this is a good diversification option, with holders able to trade in a highly regarded insurer.
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 to 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 5.80%* and the Portfolio is an approximate $205k spend.
This month, no changes were made to the Sample Portfolio. The current market dynamic at play, namely a tightening in credit spreads (i.e. the difference in yield between a corporate bond and government bond of similar maturity), has seen demand for bonds with attractive yields and relatively low credit risk extremely high. As such, the supply in a number of notes has dried up.
The running yield of the portfolio for July was approximately 5.80%. While somewhat similar to previous months, we note the yield has tightened over the course of this year (as mentioned before). Locking in yields on longer-dated bonds still remains a viable strategy, particularly as central banks begin their rate cutting cycles. But from an Australian perspective, short-dated floating rate notes could also be considered, as the RBA is further behind peers in the rate cutting “race.”
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.