September saw some large movements in yields, marking the end of the summer break in the Northern Hemisphere. The 2-year US government bond yield was up close to 100 basis point (bp) over the period, reflecting the markets finally admitting that the US Federal Reserve (Fed) is placing its fight against inflation ahead of everything else. Locally, the Reserve Bank of Australia (RBA) delivered its fourth consecutive 50bp hike at the start of the month, on track to match the tightening of 1994. The latest move from the RBA at its October meeting though points to a slowdown, at least in Australia.
Despite this material rise in yields, we saw a flurry of new issuances in the financials sector (Challenger Life, ANZ, Judo Bank, AMP Bank), with strong demand for fixed rate instruments to lock in attractive income. The residential mortgage and asset back securitisation market was also back in force, with transactions from Columbus Capital (Triton), AFG and Athena (Olympus).
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.19% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
With yields rising over the month this portfolio now yields over 5.50%. Amazing that a year ago this portfolio yielded just 2.68%. The world has significantly changed in that time!
With a number of new issues during September, we have added the new Tier 2 from Challenger Life and the new Tier 2 from ANZ. These replaced similar instruments from NAB and Macquarie Bank, with the switch marginally improving returns and providing some relative diversification from major banks. These two combined switches though maintained credit quality.
September also saw renewed issuance in the residential mortgage and asset backed securities market. We consider swapping the Triton notes for the newly issued Olympus notes (from Athena) but opted to retain the current position to maintain credit quality (to the marginal detriment of yield).
Balanced portfolio:
The Balanced portfolio adds higher yielding bonds to the base Conservative portfolio to achieve a higher yield, while 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 7.35% and is an approximate $570k spend.
This month, we did the same switch as above (Macquarie Bank to Challenger) and also opted to switch the Triton 2022 for the new Olympus 2022 with the yield pick-up compensating for the lower credit quality (although remaining in investment grade).
We also switched the Elanor floating rate bond for the new AMP Bank Tier 2 notes. This switch maintains a floating rate exposure. The marginally longer time to expected maturity is offset by an attractive yield and a switch from an unrated exposure to one from an investment grade APRA-regulated issuer (noting the notes are sub investment grade).
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 17 bonds, yields 9.63% and is an approximate $540k spend, demonstrating the concept of greater diversity in higher risk positions.
With the recent sharp rise in the GBP yield, we have added the Credit Agricole Additional Tier 1 Capital notes, from one of the largest bank globally and rated investment grade. This replaced the Mineral Resources bond. We also switched the Pemex bonds with the Edison corporate hybrid, giving up some yield but reducing the time to expected maturity by about five years.
Similar to the Balanced portfolio, we switched Elanor with the AMP Bank Tier 2.
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