It would be a bit of an understatement to state that the previous month was an extremely eventful one. The big news was undoubtedly Donald Trump’s election win, along with a clean sweep by the Republican party. There is plenty of uncertainty and angst regarding how Trump’s policies will affect the US and world economy. We have received a sneak peek as the President-elect has begun appointing his preferred cabinet and has already said he will impose tariffs on China, Canada, and Mexico. This uncertainty and guessing game will likely continue until Trump is actually inaugurated in January; so expect more market movements.
In early November, the RBA kept rates on hold again. The minutes from that meeting suggested that, on balance, the RBA is maintaining a hawkish stance because the labour market is tight and underlying inflation too high. One comment that materially reduced the prospects for a near-term rate cut was that the board “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.” On a timeline basis, this would lower the odds of a move in February 2025. As it stands, markets have locked in May for the first rate cut.
The FOMC looks to be taking a gradual approach to interest rates from here on. At their meeting, the committee lowered rates by 25bps, and also reduced its assessment of the downward risks to the baseline forecast for economic activity in light of incoming data. This data includes no sign of rapid deterioration in the labour market, resilient consumer spending, and continued progress on inflation. The Bank of England seems to be following a similar approach, while the ECB is on a knife-edge between a smaller cut or outsized one given the poor state of its economy.
In this edition, we added the QPH Finance Senior 2030 and WestConnex Senior 2030 notes to the retail menu, though did not add these to the Sample Portfolio. We explore the changes made to the portfolio below.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio whereby we aim to weigh an appropriate level of risk and return. This is particularly relevant in light of the current market dynamics where yields on highly rated bonds are falling. Overall, it remains more skewed towards preserving capital rather than chasing yield. It aims to have 20 positions.
There was just one change made to the retail portfolio this month and it was a same-name switch. We added the AusNet 6.134% 2033 Senior notes and removed the AusNet 3M BBSW+3.10% 2025c notes. This switch was done on a yield basis, as the longer-duration option was yielding more than the other which is callable next year. There is supply available in the 2033 notes.
The running yield of the current portfolio was around 5.54%*, and the Portfolio is an approximate $202k spend. The average yield remained lower compared to previous years, and even to the start of this year, on account of rate cut expectations and tightening credit spreads. Rate cuts have since occurred across the globe and with more priced in, yields on most bonds could remain at similar levels or continue to fall. However, global events have changed this dynamic slightly over the last few months. As noted above, central banks are now more cautious regarding rate cuts, and this has seen yields jump higher. This provides another opportunity to lock in better returns than otherwise would have been available in a pure rate cutting cycle.
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.