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Wednesday 08 May 2024 by Jonathan Sheridan Trade opportunities

Wholesale Sample Portfolios Update – May 2024

There has been a lot of activity in the market in April, which was a contrast to February and March. The action was mainly in the government market, which acts as the base rate for all other bonds.

Rate cuts have basically almost completely been priced out for the rest of 2024 as stickier inflation prints in both the US and domestically pushed traders to reconsider the timing and depth of expected cuts.

This pushed yields up almost 0.40% across the curve, which has resulted in better yields on offer for new investors but lower prices for existing bond holders.

Conservative portfolio:

This portfolio is all investment grade and all AUD.

The current portfolio yields 5.90% and consists of ten bonds of roughly equal weight by value to total an approximate $480k 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.

The rise in yields across the curve affected all the bonds in the portfolio, and the whole list now yields 0.25% more than it did a month ago.

With the higher yields we reconsidered the HSBC 2029c subordinated bond and the Aurizon 2031 senior bond that we looked at last month but given the yield on the WBC 7.199% 2033c is still higher by about 0.25% we decided not to make any changes.

When yields move like they have in all maturities with no news to drive individual bond prices, inevitably, if the portfolio already contains the best value bonds, then they remain the best value and so changes are unlikely.

There were no significant new issues in the month either that changed the bonds we like.

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 7.02% and is an approximate $600k spend.

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

As with the Conservative portfolio, yields went up across the investment grade portion of the portfolio, but not to the same extent in the high yield portion as these bonds are driven much more by individual company factors rather than the wider market.

During the month CEFT refinanced their existing 5.8% fixed rate bond into a new 2-year floating rate bond paying a coupon of BBSW +5.00%. Given the Société Générale bond is due to be called in September, the yield is getting a little skinny in comparison, so we switched the CEFT in for it.

This does nominally increase the credit risk in the portfolio from a BB rated bond to an unrated one, but CEFT has performed well over the last few years and holders are well rewarded for the risk.

We made no other changes.

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 15 bonds, yields 9.90% and is an approximate $478k spend, demonstrating the concept of greater diversity in higher risk positions.

With the lower capital value of this portfolio (after the removal of some of the USD bonds some months ago) we decided to simply add the new CEFT bond to the portfolio rather than switch out the Société Générale bond as we did in the Balanced portfolio.

This gets the value up to approximately $450,000 which is much closer to the target value of $500,000 and is also yield and income accretive.

The NCIG 2027c bond has seen large institutional demand in the month and as such the price has jumped by nearly $3 and brought the yield down to around 8.5%, which has reduced the portfolio yield commensurately. However, with a 12.5% coupon the income is very valuable, and as the yield to maturity remains high, we keep it in the portfolio.


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