The market has been volatile over April since “Liberation Day” on the 2nd, but quiet on the trading front as the volatility, and even more importantly the uncertainty, has made it tricky to price bonds.
This calmed down in the last half of the month which was then beset by public holidays which kept the lid on trading as well.
Australian markets reacted differently to US markets, with local yields lower across the curve by around 20bps. The US government yield curve however steepened considerably, pivoting around the 10-year maturity which was basically unchanged. Short yields were lower as Fed rate cuts were priced (even as the Fed itself communicated a watch-and-see situation) and long 30-year yields were up pretty strongly.
Credit spreads widened across all tenors and ratings bands, with investment grade between 20-30bps higher and high yield between 40-100bps wider.
Primary markets were closed for the same reason as issuers could not gain confidence in issuing spreads or outright levels, apart from the ACTR and NSW governments towards the very end of the month.
All in all the uncertainty has made it tricky to do much in any part of the market. As we enter May it seems things are calming down but it could only take one random tweet or TruthSocial post to upset the apple cart again.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.63% and consists of ten bonds of roughly equal weight by value to total an approximate $515k spend.
With all the volatility, there have been no new bonds to move existing ones out of the portfolio.
However, as mentioned, NSW did manage to tap an existing issue – the 4.75% Feb 2037.
In about 2 years this bond will fall into the basket used to reference the 10-year bond future, and as a result, will be much more attractive to investors, such as bank balance sheets, that trade it as they will also be able to better hedge the interest rate risk.
It is liquid now in small parcels but will get even more so once this happens. The federal government 4.5% Apr 2033 bond we had in the portfolio is now beginning to perform as expected, and the headline yield of 3.6% on this bond is now too low to consider buying.
The NSW bond has the Aaa rating from Moody’s and offers a yield of just under 5% with slightly longer duration. Given term deposit rates are falling as the RBA is expected to cut rates, we see this as a good alternative with very little credit risk and so switched the government bond out for this one.
This addition manages to keep the headline yield of the portfolio at basically the same (slightly higher) than the previous month despite the move lower in yields generally.
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 27% of the total portfolio) to reflect their riskier nature.
The current portfolio has 16 bonds, yields 6.29% and is an approximate $625k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
With the widening in credit spreads the balanced portfolio now yields slightly more than last month.
We also switched out the ACG bond for the NSW bond as above which improved yield. Duration as a result increased slightly to 3.88 from 3.86.
Despite investment grade primary markets being basically closed in the month, FIIG managed to raise $20m for SPC, the diversified food business, most well known for their SPC and Ardmona tomatoes and Goulburn Valley fruit products.
Offering an 8.45% yield, this consumer staples business gets straight into the portfolio. We replaced the lowest yielding unrated bond which was Clearview.
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 17 bonds, yields 7.55% and is an approximate $540k spend, demonstrating the concept of greater diversity in higher risk positions.
Spreads widened again this month although as the duration of the portfolio is quite short at just 2.98, the effect on the prices of the portfolio was limited (by design).
We made the addition of the SPC bond to the portfolio as above, replacing the lowest yielding AUD bond which was the P&N AT1. This picked up approx. 0.15% in yield for the portfolio.
Hopefully high yield markets will reopen again soon and we will have new bonds to choose from to enhance the portfolio.
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