The theme of calm, range-bound markets has continued in May, with no real news to drive markets one way or the other. Primary issuance has also been sporadic with limited opportunities to rotate capital, and issues that did come with decent relative value were typically hugely oversubscribed.
Yields have ground tighter without a catalyst to move the other way despite improving US economic data. Domestic data has been much more balanced, with retail sales and wages in particular remaining sluggish. This has been acknowledged by the RBA again in their meeting on Tuesday, where they re-iterated their stance that rates will be kept at the current low level until 2024.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 2.90% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
With no new primary issues to consider, we kept the portfolio the same. Yields were broadly flat, and the portfolio as a whole ground in by 0.05% to finish May at a yield of 2.90%.
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while still 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 24% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 3.57% and is an approximate $600k spend.
One of the new issues late in the month was an unrated bond from WA-based listed property developer Peet. The issue was more than two-times oversubscribed at the issue margin of +485 and has been offered in the secondary market at around $103.50, which equates to a margin of +403 for an expected forward yield of 4.86%.
This shows two things:
- Try to get ready for and participate in primary as soon as possible, particularly anything high yield.
- It is difficult to find value in this market with a lot of cash waiting deployment – therefore be responsive to offers when they are shown.
This being the only issue of note that we could switch into the portfolio, but with secondary availability essentially zero at present, we decided to keep the portfolio unchanged.
High Yield portfolio:
The High Yield portfolio looks to generate a high 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 5.17% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
Despite the secondary market unavailability mentioned above, we include the Peet bond in the High Yield portfolio as a placeholder for any further new issuance with a margin >+450 where we are comfortable with the credit.
The StockCo bond, whilst long a favourite, has monthly calls which places a cap on the price, so we switch this out for the inclusion of Peet.
This should serve as a reminder to current or prospective clients to be ready to seize these opportunities as they come up as they can be very fleeting.
In the last couple of weeks, the DHT 2028 bond has come back into our target zone, whilst the IAMGOLD 2029 bond has remained very stable in price. We therefore reintroduce DHT for IAMGOLD, slightly shortening the tenor of the portfolio by 1 year in this position.
This constant monitoring of bond prices is one of the many functions we perform for clients, and one of the reasons why, particularly in high yield, we advocate an actively managed portfolio strategy, as prices move in and out of where consider strong relative value.
Other USD bonds we like:
The table below continues to show other USD bonds we like that don’t fit the parameters of this particular portfolio.
To view and download our Sample Portfolios, please click here.