Following the Reserve Bank of Australia’s (RBA) rate hike in May (the first since 2010) and again in June (the biggest hike in 20 years), yields have moved higher, continuing to offer investors attractive returns. Here we provide an update on the Sample Retail Portfolio for the month.
Yields fluttered higher in response to the RBA’s May and June rate hikes, as markets repriced for further hikes. The yield to worst on the Sample Retail Portfolio slightly increased to an attractive 5.37%.
Central banks around the world have started to take a more aggressive approach to tackle the current inflation challenge. The Bank of New Zealand hiked by 50 basis points (bps), its second consecutive 50bp increase and fifth hike since October last year. The Bank of Canada raised its rate by 50bps, and the debate in the US is about how many 50bp rate hikes there will be.
The market currently has 9 rate hikes priced in from the RBA for the rest of the year, which if the RBA delivers, should see yields remain stable.
Although irrespective of what eventuates, the beauty of a well-balanced fixed income portfolio is that it will continue to provide a regular, stable income no matter what.
FIIG expanded its retail product offering to include investment grade bonds from NBN Co Limited, Macquarie Bank and NAB, and a higher-yielding opportunity from MyState.
NBN-2.20%- 16 Dec 2030 senior debt
MacBank-BBSW+2.90%-28 May 2025c Tier 2 Subordinated Capital
NAB-3.225%-18 Nov 2026c Tier 2 Subordinated Capital
MyState-BBSW+4.35%-10 Jul 2025c Tier 2 Subordinated Capital
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have around 10 positions, with the higher yielding bonds in smaller parcel sizes to reflect their assumed higher risk.
The current portfolio has 12 bonds, yields 5.37% indicatively to worst* and is an approximate $200k spend.
With a number of new bonds being made retail available, we included the Macquarie Bank 2025c Tier 2 Subordinated floating rate notes and also the NBN Co Limited 2030 fixed rate bond. Both offer appealing returns for their investment grade credit quality. Rate movements have enabled investors to achieve better returns from higher credit quality bond offerings.
The NBN Co Limited 2030 bond is trading at a significant discount to face value (below $100), providing an attractive entry point and capital gain if held to maturity. Meanwhile the Macquarie Bank 2025c Tier 2 Subordinated notes offers the portfolio a higher running yield, paying a quarterly coupon of 3M BBSW plus 2.90%.
To allow for these new additions, we removed the NAB 2029c AT1 hybrid for lack of supply and Genworth 2025 Tier 2 Subordinated floating rate notes, which is also hard to source.
We also trimmed our exposure to ClearView’s 2025c notes by $5k, which offers a higher floating rate coupon, however being of sub investment grade quality we prefer to keep these allocations appropriate in size to the overall portfolio.
Although we aim to hold around 10 bonds, we currently hold 12, which provides better diversification and allows us to maintain a similar weighting to fixed coupon bonds and floating rate note exposures.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Fact Sheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
*Please note the indicative yield shown is the minimum expected yield to worst (YTW).