This month was a good one to take a holiday. With Europe sweltering at the beach it seems our bond markets have also been soporific. Listed issuers are in the blackout before results are announced and so there has been virtually no primary issuance to shake things up.
The yield curve steepened over the month as short-term yields ground tighter in the absence of supply, while 10-year yields ended where they started. Credit spreads widened marginally offsetting the lower base rates. Very boring…
Conservative portfolio
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.69% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
With nothing happening in wider markets in the month, we made no changes to the portfolio.
Westpac issued a new 5 and 10-year Tier 2 subordinated bond in late June, which we considered switching in for the Challenger 2027c, but the 0.20% pickup in yield for a 6-year extension didn’t look like good enough value.
As we approach the top of the rate cycle, there will come a time when adding duration (interest rate risk via longer-dated bonds) will be appropriate, but given it isn’t clear if we are there yet, it is still a little early.
When we decide to make this move we will let everyone know.
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 39% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 8.05%, and is an approximate $575k spend.
One of the main benefits of a bond portfolio, and particularly one that adds selected higher-yielding bonds to conservative investment grade positions, is that the regular income generated is strong.
This means that unless a compelling switch opportunity arises, the portfolio can be held and the income is consistently received.
With nothing to move markets this month, we kept this portfolio the same, and are content to keep accruing the coupons.
With the move slightly wider in credit spreads, the portfolio now yields over 8%, with 60% being investment grade lower-risk bonds. A strong risk/reward balance.
High Yield portfolio
The High Yield portfolio looks to generate a higher yield while still looking to have a bias toward 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 10.03%, and is an approximate $500k spend, demonstrating the concept of greater diversity in higher-risk positions.
With another month of no new high-yield issuance in the month, we make no changes to the portfolio.
The upgrade of the Macquarie AT1 in June drove some price consolidation of all the Australian bank USD AT1 bonds, which finished the month about $3-4 higher than the prior month.
The other USD AT1s that we like from QBE and ING also rose in the month, with most of their yields in the high 7% area versus the low 9% of a month ago. However they still represent good relative value in the USD market, so we keep them in the portfolio.
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