January as usual is a pretty quiet time of year, with most market participants on their annual break. The same cannot be said for the Treasurers of the large banks, who clearly spent their holidays planning to issue bonds as early in the year as possible.
With the Reserve Bank of Australia (RBA) having closed the Committed Liquidity Facility which helped banks with their funding, there is suddenly a need to issue senior bonds again. In the last week we have seen CBA (with the largest corporate bond ever issued in Australia at >$4bn total issue size), WBC and Suncorp all issue senior bonds, as well as Rabobank.
Reflecting their safety, none of these had yields high enough to entice us to include them in the portfolios, but it is an interesting development in the market, which has had no senior bank issuance for more than a year due to the RBA’s pandemic facilities.
Outside of these there has been no new corporate issues in January, although late in December there was one which we include in the High Yield portfolio.
Yields in the market have generally drifted higher, as markets are pricing in more central bank rate rises earlier than previously, so all the portfolios look a little more attractive than they did to end 2021.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 3.61% and consists of 10 bonds of roughly equal weight by value to total an approximate $500k spend.
Moving a little shorter in duration with the Computershare bond last month turned out to be a good move as yields across the curve have risen, so this limited the impact on capital price. Floating rate bonds have also improved in yield with the increased rate expectations.
As the portfolio is relatively short, with a weighted average duration of just 3.6 years, the increase in yields has had only a minor effect on the portfolio – an increase of 0.09% since the last update at the start of December.
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 38% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 4.42% and is an approximate $620k spend.
As mentioned in the introduction, there was a new issue later in December that we felt should be included in the portfolios this month. Partners Life, the second largest life insurer in New Zealand, issued an unrated AUD denominated bond.
A solidly rated business by AM Best, the specialist insurance rating agency, with an attractive coupon of BBSW + 4.50% and a forecast yield of nearly 6%, ticked all the boxes for our higher yielding portion of the portfolio.
We switched out CEFT, which although shorter dated and lower yielding even though it is fixed, might well deliver a lower yield for a similar risk if the expected yield does eventuate for the slightly longer dated Partners bond.
Being floating rate, it also removes a little interest rate risk from the portfolio, which with the market consensus being for higher rates, makes the portfolio more defensive in that environment, which is a good thing.
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 16 bonds, yields 6.67% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
As above, the Partners Life new issue showed good relative value. From the existing portfolio, the Edison Mar 2026c bond has flown in the face of the general market, going up in price and therefore down in yield. Being quite short at just 4-years to the call, the yield of 3.8% is not high yielding enough for the parameters of this portfolio, so we replaced it with the Partners Life bond.
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