As the domestic market came through reporting season, the new issue pipeline picked up strongly with some quality new bonds available.
The catapulting of the Australian market into third place globally in terms of primary volume was reinforced by US tech giant Google coming to market with the largest corporate AUD bond in history. A whopping $5.5bn was issued in a multi-tranche offering that attracted an order book >$18bn at its peak.
Macro-economic data – notably monthly CPI and GDP towards the end of the month, both coming out ahead of consensus forecasts firmed pricing for an RBA rate hike this year, with the November meeting the favourite but September also coming up as the likely first mover.
US data has also firmed pricing for a US Federal Reserve rate hike this year, so it seems short term rates are on track for further increases. Longer end pricing has also continued its rise, fuelled by fiscal incontinence by governments globally. It seems no politician has the stomach to make the hard decisions needed for the future prosperity of their respective nations, instead saddling them with a mountain of debt.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.47% and consists of ten bonds of roughly equal weight by value to total an approximate $510k spend.
The Google issue, rated AA+, prompted the market as a whole to switch out of similarly rated semi government and RMBS bonds into the new corporate issuance for an increase in yield and income. We were no different, replacing the NSW 2037 with the Google 2036 for a 50 basis points (bp) increase.
The US’s largest electricity utility, NextEra Energy, issued 5-year floating rate subordinated floating rate bonds at a very attractive margin compared to existing utility equivalents. We therefore switched out the APA 2033c for the shorter, higher rated and higher yielding NextEra.
ANZ issued a standard 15-year non-call 10-year subordinated bond at an attractive 6.446%, UK electricity utility SSE Plc at 6.30% and NCIG did a 5-year secured bond at 6.09% but none of them yield enough for the tenor or rating to make the cut this month – it’s a tough new world out there.
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 41% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 6.97% and is an approximate $603k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative portfolio.
The FIIG originated, WA Stockwell bond matured in August after textbook performance throughout its life. It is always disappointing to see a high yield issuer completely redeem a bond but by the same token it is always great to be repaid as well.
Fortunately, there was a new unrated bond issued during the month from Dominion, a subsidiary of the Realm Investment House portfolio. Realm specialise in asset backed lending and some private credit and have a very strong track record. The 2½ year bond targets a BB rated underlying portfolio and pays a margin of 3.20% over 1M Bank Bill Swap Rate (BBSW) for a strong forecast yield of 7.30%.
We also made the APA for NextEra switch per the Conservative portfolio and are looking forward to more high yield issues in the next couple of months.
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 15 bonds, yields 7.39% and is an approximate $450k spend, demonstrating the concept of greater diversity in higher risk positions.
We replaced the WA Stockwell maturity with the new Dominion bond as above and await what we are told are several new high yield bonds coming in the next couple of months, which will be very welcome after the recent drought.
In the foreign currency allocation, we are switching between USD and GBP as maturities arise and yields improve, as well as lengthening tenor. The Barclays 2030c USD bond was yielding below 7%, so we replaced it with a slightly longer BNP 2035c USD bond yielding well above 7%. Given the portfolio’s short overall maturity profile, we can add some 10-year exposure, particularly through junior notes from a large bank.
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