Wednesday 31 January 2024 by Thomas Sharp different shells on a table Trade opportunities

Retail Sample Portfolio Update – February 2024

The last two months in markets have been exciting, to say the least. As recently as October, ‘higher for longer’ was the go-to theme amongst central banks. Now, rate cuts are the talk of the town.

The US Federal Reserve is trying to push back against expectations of imminent cuts. While markets have taken some notice, there are still five and a half rate cuts expected by the market. Falling inflation has been the main catalyst for these expectations. However, while cuts are still likely this year, resilient GDP and employment data mean the FOMC doesn’t want to act too soon.

Some rate cut expectations, around two in total, have also been priced in Australia. But it is important to remember that Australia is not the US, and it is quite possible that the US rate cuts come well ahead of Australian moves. Services inflation remains sticky, and wages are elevated. The tax cuts will add some spending to the economy too, but the impact will depend on how much slack remains. There are clear risks that rates will indeed stay ‘higher for longer’ in Australia. However, there has been some weakening in the labour market which may work against some of these factors. Time will tell what the RBA decides.

The expectation of rate cuts this year has presented an opportunity to lock in high yields. One of the most repeated phrases in bond markets is “When yields fall, prices rise.” When the time comes, clients can achieve better returns from capital appreciation.

No new bonds were added to the retail menu over the last two months.


fiig australian bond fund


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 20 positions, with the higher-yielding bonds in smaller parcel sizes to reflect their assumed higher risk.

The portfolio yields an indicative 5.80%* to the assumed maturity dates and is an approximate $205k spend.

There were six changes made to the retail portfolio this month to offer more choices to investors. We previously had some positions that were much larger than the minimum size. We are reducing those excess positions this month and replacing them with new bonds to improve diversification. Most of the new additions were skewed towards fixed rate notes in line with FIIG’s LOCK Strategy for 2024, which as described above, is about locking in higher yields.

-          QTC 6.50% 2033 Fixed

-          ANZ 6.405% 2029c Fixed

-          CBA 6.86% 2027c Fixed

-          Transurban 3.25% 2031 Fixed

-          Qantas 5.25% 2030 Fixed

-          AMP BBSW+4.65% 2027c Floating

The running yield of the portfolio is fairly strong at 5.80%, so picking up higher-yielding bonds now before rate cuts fully come on the agenda is a good strategy. With yields this high the opportunity cost of owning the bonds is small.

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.