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Wednesday 27 March 2024 by Jonathan Sheridan Trade opportunities

Wholesale Sample Portfolios Update – April 2024

March has been a relatively quiet month with yields trading in a relatively tight range, ending about 10bps lower, as the RBA has been on hold since November and the market consensus being the rate hike cycle has ended.

The question now being asked is when will inflation be considered under control and rate cuts can start happening to provide some relief to mortgage holders? If the recent unemployment numbers continue then that date is looking further off, with a very strong February print and unemployment back down to 3.7%.

Higher yields are of course much better for investors, with the yield on investment grade bonds remaining above the dividend yield of the ASX200, which hasn’t been the case since 2012.

Conservative portfolio:

This portfolio is all investment grade and all AUD. 

The current portfolio yields 5.64% and consists of ten bonds of roughly equal weight by value to total an approximate $530k spend.

As a reminder, the portfolio contains a government and semi-government bond with low yields. These are not expected to be held to maturity, but instead traded if and when yields fall. Therefore, the portfolio yield is understated compared to expectations given it is unlikely this low yield to maturity will be realised on these bonds.

We have traded a lot of investment grade RMBS in the last month, particularly in the BBB rating band. The portfolio has had an A-rated note included for some time now, but as the risks from mortgage stress are receding as mortgagees adjust to the new rate environment, we are happy to go down a notch to pick up some extra yield.

HSBC issued a new subordinated bond – their first in AUD – during the month at an attractive yield of 6.2%. However, that didn’t last long and having rallied the yield is now more like 5.7%. We would have included it at 6.2%, but at the current yield we prefer the higher income of the WBC 7.199% 2033 at a broadly similar yield, despite the higher capital price.

This also maintains the longer duration of the portfolio, looking to pick up further capital price improvements should the yields fall.

Liberty Financial did indeed issue their annual new bond at an attractive yield. We therefore replaced the 2028 version with the new 2029 maturity for a pickup in yield from the same credit for a one-year extension in tenor, but no corresponding duration increase as the bond is floating rate.

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 38% of the total portfolio) to reflect their riskier nature.

The current portfolio has 16 bonds, yields 6.80% and is an approximate $600k spend.

This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.

We make the same change to the investment grade RMBS as in the Conservative portfolio.

It is also time to say goodbye to one of my all-time favourite bonds, the Genworth BBSW +5.00% 2025c. It is getting close to the expected call date and the yield is reducing so we switched this out for the new Liberty bond as above for a decent pick up in yield. Again, both are floating, so no change to duration.

Pepper Money have a new 2026c subordinated bond, so we simply switched the 2025 for the 2026 for a yield pickup.

There was no new high yield RMBS issuance, so we made no changes there. Spreads are reducing in the face of relentless demand so in any case we may not have found a new bond attractive enough.

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 14 bonds, yields 9.29% and is an approximate $420k spend, demonstrating the concept of greater diversity in higher risk positions.

We make the same change extending the Pepper Money maturity as in the Balanced portfolio above.

The Macquarie 6.125% 2027c USD bond just sneaks over 7% in yield and so we keep it in the portfolio despite it being rated investment grade after the recent upgrade. We are cautious on USD at these levels but at this yield for this quality it stays in for now.

There being no other high yield issuance the remainder of the portfolio remains the same, earning a very strong ~8.5% running yield.


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