Another boring month was August – right up until the last few days when markets anticipated a momentous announcement regarding the removal of monetary stimulus from the US Federal Reserve (Fed) at the Jackson Hole Symposium . Finally a new issue came to market that priced attractively, and we could really have a good go at participating in.
Luckily for us the new issue ended up being a good one and we received a very strong $46m allocation into the new Pacific National 3.80% 2031 bond, from an order book of $64m. More on this one below.
On the other side of the coin, Fed Chairman Powell presided over a snooze fest of an announcement which basically said they might think about ‘tapering’ their bond purchases by the end of the year. So back to the current torpor for at least another month.
The Residential Mortgage Backed Security (RMBS) deals we continue to like are all between five and ten times oversubscribed. Clearly the rest of the market is agreeing with us on their relative value – they just can’t be that interesting as we get so little of them.
This portfolio is all investment grade and all AUD.
The current portfolio yields 2.68% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
Finally, on the second last day of the month, we participated in a new issue that we really liked – a 10 year bond from Pacific National. We have long been fans of this particular credit as its fundamental strengths in long term contracts and near monopoly position are often ignored due to its private ownership (which we actually also like due to the calibre of shareholder). Because of this the bonds usually come cheap.
This was no exception, with the pricing at least 0.20% higher than expected, which also meant a good-sized deal ensued and the prospect of good allocations. Finally pricing at a 3.80% coupon we took up a large allocation across a lot of clients.
We add the new bond to the portfolio as a switch for the previous 2029 bond which we liked for all the same reasons, but the extra two year tenor is much more than compensated for by the almost 0.60% increase in yield.
In general, yields ground tighter again so the portfolio only added 0.07% from last month, but in this environment we will take those wins where we can get them and expect the new bond to perform very well indeed.
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 3.55% and is an approximate $650k spend.
Nothing to add apart from the same switch as in the Conservative portfolio, which added 0.12% to the portfolio yield as the high yield bonds held their yields better than their investment grade comrades.
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 5.42% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
This month, like the more conservative portfolios, we found a single switch option in the USD portion that we thought offered value. IAMGOLD has been an issuer we have liked for many years and have invested in all three of their bonds throughout that time as they have repaid and reissued new bonds.
They currently have a 2028 maturity which we initially bought around $102.00, but then the price became too expensive for us and we took it out of the portfolio in June of this year, to bring DHT in. This trade has worked out well as DHT has appreciated and IAMGOLD has become cheaper, so this month we are reversing that switch and bring IAMGOLD back into the portfolio at a yield over our target of 5%.
This switch has improved the portfolio yield by 0.18%, as most of the other bonds in the portfolio have remained stable in terms of return offered.
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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