February saw the first complete month of the Trump presidency and it didn’t disappoint in terms of generating headlines.
What was surprising was that despite the uncertainty and volatility from day to day, the local market finished the month almost unchanged in terms of yields.
The RBA cut as expected and priced by the market, which removed one large potential disruption and was followed by weaker jobs and wages data that justified the cut.
Globally, the astonishment of the US’ seeming withdrawal from supporting Europe, and Ukraine in particular, militarily has prompted major European nations to announce they will ramp up defence spending and in Germany, lift debt restrictions. This has sent yields rocketing higher.
This is all good for new issuance, of which we have seen a flurry post reporting season. Lots of bonds to choose from for the portfolios.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.73% and consists of ten bonds of roughly equal weight by value to total an approximate $515k spend.
As a reminder, the portfolio contains a government bond with a low yield. This is 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.
In the last 10 days alone, we have had 7 new issues. As usual we select only the best value for the portfolios.
With credit spreads contracting across the board, new bonds are currently representing the best chance to improve yields.
Of the 7 new bonds, we chose 3 to include in the portfolio.
Transgrid priced an 8-year fixed rate subordinated bond at 6.277%, which is still available around 100.75/6.16%. We switched out the BNP 6.198% 2031 which has rallied nicely since its issue in December but now yields only 5.30%.
This goes further to reduce our Financials exposure and increases infrastructure.
Liberty Financial priced their annual new bond as a floating rate senior bond at a margin of +205 which is still pricing around +180. This is a big pick up over the identically rated QBE 2031c subordinated bond, so we swapped that out.
HSBC priced a new floating rate subordinated bond on Tuesday at a pretty good margin of +187, and that can be accessed at +177, which is an improvement of 30bps on the ANZ hybrid in the portfolio which given the higher rating seems much better value.
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 6.23% and is an approximate $610k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
Of the 3 new bonds above, we brought 2 into the Balanced portfolio. Liberty came in for the ANZ and we replaced Victorian poles and wires for NSW, swapping out the Ausnet 2031 fixed rate bond for the new Transgrid.
This has kept the fixed/floating balance the same, with the rates picture looking pretty well balanced and the portfolio with a shortish, but longer than previous, duration of 3.47.
With no new high yield issuance in the month that portion of the portfolio remains the same.
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 7.06% and is an approximate $540k spend, demonstrating the concept of greater diversity in higher risk positions.
With credit spreads continuing to contract, the portfolio yield has fallen this month.
Barclays issued a new 2035c AT1 in the last fortnight but the curve for this issuer’s AT1s is pretty flat and we decided that the 15bp pick up for the extra 5 years of tenor was not enough to justify replacing the existing Barclays AT1 in the portfolio.
We could have replaced one of the other lower yielding USD bonds but that would have increased the allocation to the one issuer in junior securities beyond the level we really want.
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