Wednesday 16 November 2022 by Jessica Rusit Trade opportunities

Retail Sample Portfolio Update – November 2022

The month kicked off with another smaller rate increase, and yields retreated on lower rate expectations. We added new bonds to the retail available list, and the portfolio continues to offer a return above 6.00%. Here we discuss the changes made to the Sample Retail Portfolio for the month of November.

Retail Update

The Reserve Bank of Australia (RBA) stuck to its guns and increased rates by 25 basis points (bp) at its November meeting. This was despite a stronger than expected September inflation print, which had markets speculating on a possible 50bp hike.

On the other hand, US inflation dropped more than expected for October, which has re-invigorated the predictions for the US Federal Reserve’s (Fed) December meeting and the trajectory over the next 12 months. Although for context, inflation remains elevated at about 5.4% annualised.

Yields have retreated about 25bp at the time of writing as markets reprice rate expectations. The 10-year Australian government bond yield was mostly above the 4.00% mark for October, getting up to 4.19%, but has since tightened and is currently around 3.60%. One thing that appears almost certain though is that we will see a fair bit of volatility in the lead-up to Christmas.

The return on the Sample Retail Portfolio is now at 6.49% to worst*, remaining well above the 6.00% mark following moves in rates and also portfolio changes we made. Also worth noting is that this is with a 90% allocation to investment grade bonds, providing an attractive risk/reward balance.

Over the month there were additional bonds added to the retail product offering to further diversify retail portfolios and improve returns. These include:

  • WestConnex-3.15%- 31Mar31 Senior secured
  • Origin-2.65%-11Nov27 Senior unsecured
  • Bank of Queensland-BBSW+1.60%-29Jul26c Tier 2 subordinated
  • Airservices Australia-3.25%-15May26 Senior unsecured
  • Airservices Australia-2.20%-15May30 Senior unsecured

Retail Sample Portfolio

The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and selective 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. Currently the portfolio holds 13 bonds, which provides better diversification with ongoing market uncertainty.

The current portfolio yields 6.49% indicatively to worst* and is an approximate $200k spend.

With the newly available Bank of Queensland (BOQ) 2026c Tier 2 notes offering an attractive return for its strong credit, we added this in the portfolio. The NAB 3.225% 2026c Tier 2 subordinated fixed rate notes were removed to allow room, which is currently in short supply and offers a lower return compared to the BOQ notes.

While remaining in a Tier 2 capital position, we have increased our floating rate note (FRN) exposure and reduced our fixed coupon holding, where we typically prefer a more even weighting between the two (if anything possibly more to fixed rate with the RBA flagging a less aggressive rate hiking outlook). We will look for attractive fixed coupon opportunities to rebalance this in the portfolio.

The switch also improves the portfolio’s running yield, with the BOQ 2026c currently offering a coupon rate of 4.686% for the quarter, compared to the NAB 2026c fixed coupon of 3.225%. The BOQ note, along with other FRNs in the portfolio, will see their coupon rates improve come the reset date with the 3month Bank Bill Swap Rate (BBSW) at a higher level than when the current coupons were set.

We will take advantage of these higher income streams while rate hikes are still on the horizon, and when the rate view changes, the fixed rate portion will provide the bulk of the income, which shows the benefits of a well-constructed portfolio.

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 that can be achieved, referred to as the yield to worst (YTW).