As another season rolls around, we’ve reviewed the Sample Retail Portfolio for the month of September and discuss how we’re positioning the portfolio going forward.
While this month welcomes a change in season, no change to the cash rate is expected when the Reserve Bank of Australia (RBA) meets for the month. A stronger July inflation figure surprised markets (trimmed mean at 2.7% compared to 2.1% prior) and while its unlikely the RBA will read too much into one print, it may push back the timing of the next rate cut towards November.
In the US, Federal Reserve (Fed) Chair Jerome Powell signalled that rate cuts are possible during his speech at the Jackson Hole conference late last month, moderating his opposition to cuts if the data supported such a move. Markets repriced five cuts in nine meetings, a slightly more aggressive rate cut cycle than prior to the speech. While ongoing concerns around the Fed’s independence have come to the forefront again, following President Donald Trump’s move to fire Fed Governor Lisa Cook. The matter has further fuelled worries over inflation and the long-term fiscal outlook.
As a result, the US Treasury curve came under renewed pressure with the 30-year yield climbing higher over the month, further steepening the yield curve. With the short-end of the curve aligning with dovish tones from Fed Chair Jermone Powell, the 30-year yield has drifted higher on the potential for rate cuts possibly adding to longer term inflation. The US curve is steepening, but also drives results in other parts of the world, including Australia, which was steeper over the month also.
With this backdrop for volatility and uncertainty in the US, some European issuers have looked to the Australian bond market for inaugural deals, with the likes of Grenke, Vonovia SE and Eletricite de France issuing new bond transactions. This provides better liquidity and diversification for Australian fixed income investors.
While no new retail bonds were added to the product offering over the month, the Retail Sample Portfolio was kept unchanged over the month, as we continue to monitor supply and opportunities to consolidate our holdings and improve the overall return.
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.
The portfolio is expected to yield around 5.02%* to maturity for the month, with and has approximately $206k invested.
Following a few changes made last month to the portfolio, we left the portfolio unchanged this month as we wait for supply in some preferred bonds and opportunities to add new retail available bonds. As we have mentioned, we intend to reduce the number of bonds in the portfolio, last month we reduced the size from 20 bonds to 17, however will aim to further lower the exposures to around 15. This will still ensure adequate diversification in the portfolio.
Going forward we’re also looking to exit some holdings that are due to redeem over the next one to two years (our holdings in Ampol, Judo and AMP) and are currently trading at a premium to par ($100) of around $6 to $9. In selling these holdings and locking in the capital gain it improves overall returns for the portfolio, while reinvesting in higher yielding options. One such bond we continue to look for supply in is the Heartland 2029 callable floating rate note, which offers a good higher margin coupon over the 3-month Bank Bill Swap Rate (BBSW) and higher indicative yield, and would be an ideal replacement for the portfolio.
We continue to favour high-quality credit for the portfolio, with selective and smaller allocations to high yield exposures.
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.