It’s been a topsy-turvy month in the bond market with certain signs of inflation perking up their heads, particularly in the US, which has led to a repricing of the expected rate cuts to come this year, moving more in line with the US Federal Reserve officials forecasts and pushing yields higher.
Domestically we had terrible job numbers, albeit with a lot of seasonal noise, and inflation, while still historically high, trending down again.
This has meant that yields have been fairly range-bound with a slight upward trend, showing the value of keeping a decent, if slightly underweight floating rate exposure. If high margins can be achieved without taking too much risk then all the better.
Demand for new bonds in the wider market has been nothing short of astonishing, such as when Macquarie issued $1.25bn of a new subordinated bond to a record $4.95bn of demand.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.72% and consists of ten bonds of roughly equal weight by value to total an approximate $480k spend.
The new Macquarie fixed-rate bond ended up pricing with a yield of 5.95% and is available at a tick over 5.6%. This wasn’t compelling enough to include in the portfolio, particularly in light of the new bond from LBBW that we have recently added to the menu.
A subordinated bond from one of Germany’s Landesbanks (which are rated the same as our major banks at the senior level), this bond is rated BBB and yields just under 7% to the 2028 maturity. It does reduce the duration of the portfolio slightly given the shorter tenor but is worth it for the yield pickup and given we have other longer duration bonds in the portfolio.
There were no other notable new issues of investment grade quality, and so we made no changes to the portfolio. In March there will be new issues from Liberty Financial, Aurizon and Telstra, which we will consider for the portfolio.
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 toward preserving capital rather than chasing yield.
It aims to have between 15-20 positions, with the high-yielding bonds in smaller parcel sizes (comprising 38% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 6.89% and is an approximate $600k spend.
This portfolio, by virtue of the high-yielding allocation, has a much shorter duration than the Conservative.
The BNP Jan 2025 bond has rallied close to par, which is understandable given the call date is only 9 months away. Rated BBB- it is therefore a little low-yielding even for the investment grade portion of the portfolio.
We switched this for the new bond from LBBW as mentioned above. As the portfolio already costs approx. $600k, we decreased the face value of the Santander bond as the shortest, lowest-yielding fixed-rate bond by $10,000 to allow for a full allocation to LBBW at $50,000.
The Triton 2021-1 E note has been upgraded to an investment grade BBB- rating. We therefore removed it from the high-yield portion of the portfolio as it no longer fits the mandate. We have been trading a similar E note, the Liberty 2023-1 E, rated BB, with a slightly higher-yield, so switched this in.
We continue to review new issues in the high-yield space which are currently dominated by the junior notes of RMBS/ABS transactions. We will look to include them when appropriate.
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 14 bonds, yields 9.58% and is an approximate $450k spend, demonstrating the concept of greater diversity in higher-risk positions.
The ElanorWild bond has been redeemed early, delivering a good result to bondholders who went through the closure of the wildlife parks underpinning the bond during COVID, and now who have the full par amount back in their hands for reinvestment.
Although as above the Triton bond is now rated investment grade, it still yields an acceptable 8.46%. As the portfolio is undersized, ElanorWild being redeemed and in the absence of new high-yield issuance, rather than switch to a different RMBS we decided to add another junior RMBS note we have access to – the Liberty 2023-1 F note.
This is a little riskier than we would usually go for but given the short WAL and attractive price we feel the risk is being rewarded by the yield. Additionally, as this particular transaction has been amortising for almost 12 months and these notes have already been upgraded one notch from B to B+, we expect further upgrades to arrive in the next 6-12 months, bringing this note more into line with our usual risk parameters.
We are still cautious with position sizing and so add a smaller than usual allocation of $20,000 face value, or approx. 4.87% of the portfolio.
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