We wrote previously that “Markets are forever moving and changing”? Well, August was a perfect case in point, with markets strapping in for a wild ride which basically started from day one.
A dramatic risk-off move was caused by the release of US employment data, which showed a rise in the unemployment rate. The fallout lasted for a couple of days, with equities falling sharply and yields declining dramatically. Then just later that same week, more data was released which showed that perhaps the US labour market wasn’t as bad as it seemed, reinforcing the idea that markets can get ahead of themselves sometimes. Though fears of an imminent recession washed away, some doubt and caution will remain for the months ahead. Regardless, Fed Chair Powell basically confirmed that a September rate cut is locked in, with the magnitude dependent on the data.
In Australia, there was a lot to take in with inflation data slowing (as expected), retail sales flat (following two months of strong growth), and the labour market remaining solid. However, the main take away was the RBA’s comments that “a near-term reduction in the cash rate doesn’t align with the Board’s current thinking.” The cash rate remaining on hold seems to be the likely outcome for the rest of this year, in the absence of something truly shocking.
This month, we did not add any new bonds to the retail menu, though we did add a new one to the Sample Portfolio, which we explore below.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio whereby we aim to weigh an appropriate level of risk and return. It is more skewed towards preserving capital rather than chasing yield (hence the higher to weighting to investment grade credit), though yield is still an important consideration in the Portfolio’s construction. It aims to have 20 positions.
This month, we added the Aurizon Network 2030 fixed rate notes, following the full call of the Aroundtown 2025 notes. While the Aurizon notes aren’t the highest yielding retail-eligible bond available, we believe it offers diversification benefits as it is regulated infrastructure. Aurizon Network controls, operates, and manages the Central Queensland Coal Network, the largest coal export rail network in Australia which functions under a 99 year lease arrangement with the Queensland government.
The running yield of the portfolio for August was approximately 5.39%*, and the Portfolio is an approximate $206k spend.
The average yield noticeable declined (it has been around 5.80% for much of this year), which is a direct correlation to the wild risk-off market moves at the beginning of August and the expectation of global central bank rate cuts. This has been compounded by continued credit spread tightening, impacting the supply and demand of high-yielding bonds. Amassing duration is still a viable strategy, because if you wait until the RBA actually cuts rates, the market will have already moved (this is precisely what has happened). But short-dated floating rate notes could also be considered, as the RBA looks set to remain on hold for another few months.
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.