Boring…that was the month of July in the bond market– summed up in one word. All the action was in the escalating delta variant outbreak in Sydney which meant many of us are back at home again…
There were very low levels of issuance in bonds that we have an interest in (lots of issuance in what are called SSAs: Sovereigns, Supra-Nationals and Agencies – like the World Bank or the International Development Agency for example but all rated AAA and very very low yielding), nothing from the Reserve Bank of Australia (RBA) that amounted to anything, and even in the face of the continuing lockdowns, the meeting on August 3rd gave us nothing of import.
We continue to scour all parts of the domestic and international market to find bonds that offer relative value, and we hope to bring you some very soon. There is a lot of RMBS issuance scheduled for the first half of August so hopefully we get some traction there.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 2.61% and consists of 10 bonds of roughly equal weight by value to total an approximate $500,000 spend.
A bit like central bank statements after another no change rate decision, the commentary this month is the same as last month…
No primary issues we liked in July as above, so the portfolio remained unchanged and with yields moving lower in general ground in by a further 0.26% to finish July at a yield of 2.61%.
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 3.43% and is an approximate $650,000 spend.
BB rated RMBS remain the stand-out in relative value terms and there was a bit of a drought of issuance after the glut prior to July. There was only one transaction which priced right at the end of the month from Columbus Capital in their Triton program.
The margin was attractive and better than the existing note we held, so we swapped out the REDZED note we had in June for this new one for a pick up in yield of approx. 0.70%.
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 5.24% and is an approximate $500,000 spend, demonstrating the concept of greater diversity in higher risk positions.
After changes in the USD part of the portfolio last month, we again didn’t find anything in the market better than the change in the RMBS we did for the Balanced portfolio above, so we did the same for this portfolio.
Yields were a little tighter in this portfolio over the month, albeit by not as much as in the higher quality portfolios, and we ended the month 0.07% lower than at the end of June.
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.
The NCIG 2027c subordinated bond remains the best value bond in the universe we cover. Both the other bonds in the table represent good value versus the more senior bonds on offer from the relevant issuer. The two bank issued bonds have rallied a long way from where most clients entered their positions, so may seem like less value and potential exits depending on returns may also be appropriate.
All are subordinated in the capital structure which is one of the best ways to generate yield in this environment – you can find our article on the subject here.
Source: FIIG Securities. Pricing correct as 30 July, 2021
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