Wednesday 16 August 2023 by Jessica Rusit Trade opportunities

Retail Sample Portfolio Update – August 2023

With the Reserve Bank of Australia (RBA) keeping rates on hold for a second consecutive month, markets are speculating about an end to rate hikes. Regardless, providing a higher return and with a 95% allocation to investment grade bonds, the Sample Retail Portfolio yields 6.40%*. Here we discuss the changes made to the portfolio for the month of August.

It was a relatively quiet month for markets, although the RBA kept things interesting keeping rates unchanged and the market is now pricing only a 10 basis point increase for the rest of the year and cuts from early 2024.

Although the RBA hasn’t ruled out additional increases, it’s broadly expected to only be in response to stronger data. With this rate outlook there’s been growing demand for fixed coupon bonds, which allow investors to lock-in a return while yields are elevated, irrespective of cuts eventuating.

Providing a steady income, the Sample Retail Portfolio yields a return to the assumed maturity date of 6.40%*. This was also aided by changes we made to the portfolio, with a new NAB Tier 2 subordinated fixed and floating rate note added to the retail menu, per the below:

  • NAB-BBSW+2.80%-3Aug27c Tier 2 subordinated notes
  • NAB- 6.322%-3Aug27c Tier 2 subordinated notes

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 14 bonds, which provides better diversification.

The portfolio yields an indicative 6.40%* to the assumed maturity dates and is an approximate $203k spend.

We continue to add the higher coupon Tier 2 subordinated notes to the retail menu, which were issued late last year when rates were higher, including the NAB 2027c fixed and floating rate notes (FRNs). To make room in the portfolio, we switched out the CBA 2027c FRN, the same tenor and type of note, and added in the NAB 2027c FRN.

While they offer a similar projected yield, the NAB offers a slightly higher running yield, which will become more important should we see any rate cuts over the next year. With this in mind, we added in the 2027c floating rate note, which pays a margin of 2.70% over the 3M Bank Bill Swap Rate (BBSW). It’s paying a coupon of 6.98% for the current period.

The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets 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 expected yield to the assumed maturity/call dates of the bonds included in the portfolio, based on swaps rates at the time of writing.