August was another quiet month with the northern hemisphere still on holiday. The Matildas outperformed expectations as did floating rate bonds in the month, which ground tighter on the lack of supply.
Finally we got a new bond worth talking about in the last full week of the month from Lloyds Banking Group, one of the four UK majors. Their debut subordinated issue, which as such offered a really wide margin compared to similar bonds in the market, priced with a coupon over 7% and was hugely popular, attracting an order book of over AUD1.2bn for an eventual print of AUD750m.
Yields in general went up slightly over the month while margins tightened in a slow march, which ended the month with the longer fixed rate bonds offering higher yields and floating rate notes slightly lower, showing the value of the balanced portfolio.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.68% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
The new Lloyds bond was the only addition to the portfolio. To maintain the fixed/floating balance as well as the strong cashflow we swapped this in for the Challenger 7.186% 2027c, which has performed well for client since its issue in September last year, and delivered an approx. 10% total return.
The new bond is a year longer but added nearly 1% in yield to the portfolio, which is definitely worth the extra tenor.
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 7.79% 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. As this portfolio didn’t own the Challenger 2027c bond, we had nothing to switch into the Lloyds bond.
A couple of the preferred higher yielding bonds moved tighter in spread over the month, which with no changes meant the portfolio yield crept back under 8%.
High Yield portfolio:
The High Yield portfolio looks to generate a higher 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 16 bonds, yields 9.89% 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 made no changes to the portfolio.
The price increase of the USD AT1 Capital bonds have slightly come back, with most higher in yield than last month. The real mover was the QBE Jan 2025c AT1 Capital notes, which is still showing incredible value for an investment grade rated bond at 8.67% for just 21 months.
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