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Wednesday 02 November 2022 by Jonathan Sheridan Trade opportunities

Wholesale sample portfolios update – November 2022

October actually saw bond yields in the market easing a little from recent highs, mainly as a result of the move from the Reserve Bank of Australia (RBA) towards 0.25% rate increases from the previous level of 0.50%.

Yields are moving up and down largely on the expectations of the terminal rate – where the cash rate will actually end up when the central banks are finished with their tightening phase – and have been pretty volatile.

There have been more Tier 2 bank bonds issued, with the highlight being a surprise deal from CBA coming in the last few days of the month, which wasn’t flagged in advance. They printed a massive $2bn across both fixed and floating tranches, mirroring Dutch bank Rabobank, which did similar only 10 days before.

Conservative portfolio:

This portfolio is all investment grade and all AUD.

The current portfolio yields 6.38% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.

The two new Tier 2 bonds issued in the month look like excellent relative value. The longer 2029c ANZ bond in the portfolio offers a lower yield for a longer tenor, at the same BBB+ credit rating. We therefore switched that out for the Rabobank bond, which has a much higher 7.07% coupon, so improves the income of the portfolio.

Additionally, albeit a subordinated issue, the name recognition and quality of CBA as an issuer meant we felt there was no need to keep in the ultra-conservative covered bond issued by RBC. Adding the CBA adds nearly 2% in yield to that position.

We remain aware that we have a heavy weighting to financials, and these two switches are in the same sector, but with the value on offer it would seem churlish not to go where the best risk/rewards can be found.

We will keep an eye on the sector allocation, but for now we remain comfortable.

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 7.37% and is an approximate $580k spend.

No changes to the Balanced portfolio this month – one of the benefits of bonds is that they keep on paying the coupons even if you keep holding the same bonds.

We didn’t own either of the ANZ or RBC we switched in the Conservative portfolio, so nothing to do there.

One thing we are keeping our eye on is the relative value of some of the higher risk positions, which aren’t paying too much more than investment grade bonds at the moment. If this gap gets too small, we will look to upgrade the credit quality as we will be able to do so without sacrificing yield, which is always desirable.

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 10.10% and is an approximate $550k spend, demonstrating the concept of greater diversity in higher risk positions.

The high yield market has been very quiet recently given the uncertainty around the global economic outlook post the central bank tightening cycle. The rapid rate rises have had many potential issuers revisiting their assumptions of what they are prepared to pay and we have seen a couple of deals pulled as a result.

As such we make no changes to the portfolio this month and are still monitoring the GBP situation as we found the Credit Agricole bonds and there are potentially similar opportunities in that market.