As another month rolls around, we provide an update on how the Sample Retail Portfolio has been performing and how we’re positioning the portfolio for the upcoming months.
US tariff talks continue to make headlines, with the 90-day tariff delay deadline passing. President Donald Trump announced 30% tariffs on both Mexico and the European Union. This has triggered retaliatory tariffs from the EU, responding with tariffs on US goods starting in April 2025. There remains ongoing tensions and responses between the two as a deal is worked on.
The Reserve Bank of Australia (RBA) kept investors on their toes at its July meeting, leaving rates on hold when a cut was widely expected. It was only the second time since 2009 that a fully priced rate move wasn’t delivered. The accompanying RBA minutes signalled a slower path to rate cuts than markets expected, taking a “cautious and gradual” easing approach.
Also domestically, the unemployment rate rose on weaker labour force data to 4.3%, noting the RBA forecast the peak in the unemployment rate to be 4.3% - which has already been reached. This is the second consecutive weak jobs data print, and a third one could indicate a trend. It will be interesting to see where it goes from here.
With the cash rate unchanged, Australian government bond yields have drifted higher since the start of the month. Both the 5-year and 10-year yields are up, with the latter moving 11 basis points (bps) higher at the time of writing. This has allowed bond investors to purchase longer-dated bonds at better yields ahead of further RBA rate cuts, which would provide capital upside when rates move lower.
New bond issuance over the month includes a new 15-year non-call 10-year Tier 2 Subordinated note from NAB. While NSW Treasury Corp (NSW TCorp) tapped an existing 2037 bond, raising an additional AUD1.5bn. Also, Port of Newcastle issued a senior secured 8-year fixed rate bond, which was met with strong demand offering an attractive risk-reward return.
There was a new bond added to the retail product offering, a Tier 2 subordinated note from Heartland Bank Australia Limited, which pays a floating rate coupon and is callable in 2029. Heartland is a New Zealand based financial services group with operations in Australia also.
In terms of the Sample Retail Portfolio for the month, no changes have been made, although we would have liked to add the above new retail bond from Heartland, but supply remains scarce.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, designed to offer an appropriate level of risk with return. Overall, it remains more skewed towards preserving capital rather than chasing yield.
Given the limited supply in the Heartland Tier 2 subordinated notes, we kept the Retail portfolio unchanged for the month. The running yield of the current portfolio was around 5.34%*, and the portfolio has approximately $207k invested.
We continue to favour high-quality credit for the portfolio, with selective and smaller allocations to high yield exposures. Our preference for the 7-year part of the curve remains intact, offering an attractive balance between yield and duration risk. Ideally, as the tenor of our holdings shorten, we’d look to exit the position and reinvest into an alternative bond with a 7-year maturity date to continually achieve a better yield.
Although we like diversification, a portfolio of this size would still have sufficient diversification without 20 different issues, and we’d look to consolidate the number in time. In doing so, we’ll remove the lower yielding options and re-allocate to those offering better returns.
As mentioned, Heartland is one of those selective high yield notes we’d like to have in the portfolio, which offers an attractive indicative projected yield of 5.56% (equivalent yield based on its margin). As and when supply becomes available, we’ll look to add this position.
The Sample Retail Portfolio, along with the full list of retail available bonds, can be found on the FIIG Website here.Factsheets are also available via MyFIIG.
*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.