The last major domino to fall in the central bank easing puzzle went last month with the US Fed cutting rates by 0.50% in a 50:50 call which featured the first dissenting vote in over a decade.
The mythical soft landing seems on track as the US economy still seems resilient on the surface, but with large revisions of previous jobs numbers and the details beneath the headlines deteriorating, the near future may well show us a different picture.
As a result we are keeping most of our duration exposures but also hedging our bets if inflation does return – particularly since the tensions in the Middle East could ramp up the oil price and drive inflation at the same time as growth moderates.
ANZ priced a new OTC hybrid in the month which was excellent and still is good value. We also got new issues including NSW Ports as well as 2 new deals arranged by FIIG, both of which were attractive and oversubscribed by investors.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.46% and consists of ten bonds of roughly equal weight by value to total an approximate $510k spend.
As a reminder, the portfolio contains a government and semi government bond with low yields. These are not expected to be held to maturity, but instead traded if and when yields fall. Therefore, the portfolio yield is understated compared to expectations
given it is unlikely this low yield to maturity will be realised on these bonds.
Additionally, the inflation linked bonds have an assumed 2.5% inflation rate in their yields. With inflation having been high and now stubbornly refusing to come down, these bonds may also return more than currently forecast.
The new ANZ AT1 issue came with a coupon margin of 2.95% which was approx. 0.70% higher than the listed equivalents and even though it is trading much tighter now it is still a higher yield than other investment grade bonds.
We therefore included it in the portfolio at the expense of the other ANZ subordinated bond, as despite both being issued by a major bank, good portfolio discipline forbids us from overweighting one particular issuer. This increased the yield by approx.
0.30%.
Being floating, the duration of the portfolio decreased to approx. 3.75, which is not ideal if rates do decline. However, we have the ability to adjust the portfolio in real time whilst picking up the >7% cashflow of the new bond if conditions change
once more.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have between 15-20 positions, with the high yielding bonds in smaller parcel sizes (comprising 27% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 6.48% and is an approximate $620k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
We made the same change in this portfolio as above, switching ANZ for ANZ.
With the new high yield issues this month we have the opportunity to replace the lower yielding ones, in particular Emeco, for which we were waiting to find good substitutes.
As such we took Emeco out his month and replaced it with the new Thera bond, which is a 3 year fixed rate with an 8% coupon.
These 2 switches added approx. 0.20% to the yield of the portfolio.
The new Workpac FIIG-arranged deal this month is also very attractive with a coupon of BBSY +5.20%, but it is a small deal and almost never available. As such we didn’t include it in the portfolio although we would very much like to.
There was another high yield deal from MA Financial but again this was a small size and is typically very closely held, so we didn’t include it for the same reasons as Workpac.
High-Yield portfolio:
The High Yield portfolio looks to generate a higher yield while still looking to have a bias towards as low risk positions as possible.
This is achieved by good diversification and attempting to identify fundamentally mispriced bonds.
The current portfolio has 17 bonds, yields 8.05% and is an approximate $517k spend, demonstrating the concept of greater diversity in higher risk positions.
With the addition of the new Thera bond we are now in a position where the portfolio is back to its desired $500k cash spend, and we can be more selective in choosing the bonds to include.
We have found new USD options in recently issued AT1 bonds from French banks which are attractive and replace the AUD AT1 from SocGen that was called in the month.
New RMBS issues in the sub-investment grade space are currently fully subscribed before being made publicly available, so we have removed the recent Resimac issue from the portfolio and replaced it with a SocGen 2034 USD AT1 with a large 8.50% coupon.
We are looking at new GBP options which are high yielding and if we make them available to clients we will look to include them in the portfolio next month.
To view and download our Sample Portfolios, please click here.