June brought another stretch of ups and downs in the bond market. Early in the month, markets were shaken by geopolitical concerns, but by the end, sentiment had turned more positive—especially in the U.S.—thanks to a calming of tensions and a more supportive tone from the Federal Reserve. The prospect of rate cuts returned to the spotlight, as signs of cooling inflation and a more measured Fed outlook helped reassure investors.
While confidence improved, there are still undercurrents of caution. Consumer sentiment wobbled, and longer-term rates remained firm despite growing bets on central bank support. In Australia, inflation appears to be trending lower, which has increased speculation around a possible rate cut in the near term. That said, the strength in employment data suggests the RBA may still take a measured approach.
All in all, markets seem to be settling into a more optimistic, though still careful, mood. While primary market activity was quieter than the previous month, a few notable deals—such as a local issue from BPCE SA and a new USD issuance from BNP Paribas—were well received and added to client portfolios. As a result, we continue to see opportunities to adjust positioning by gradually extending duration, particularly as the case for easing monetary policy becomes clearer both locally and abroad.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.61% and consists of ten bonds of roughly equal weight by value to total an approximate $514k spend.
Firstly, regarding floating rate bonds, we remain focused on identifying the most attractive trading margins. Despite recent tightening to a trading margin of 2.13% over BBSW, we continue to see strong relative value in Aurizon’s 2030c subordinated bond compared to comparable issues. As a result, we are retaining the bond’s position in the conservative model portfolio.
Turning to fixed rate bonds, we’ve seen a strong rally across recent new issues, which have defied broader market volatility and continued to perform through June.
In light of this, a key change to the portfolio is the replacement of the existing BPCE 2033c subordinated bond with the newly issued BPCE 2035c subordinated bond in June — the clear standout among investment grade fixed rate offerings for the month. The swap enhances position yield by 35 basis points while only marginally extending duration from 6.20 to 7.28 years.
As the yield curve steepens, this modest duration increase is expected to contribute positively to portfolio performance into July and beyond. With this inclusion, the duration of the portfolio remains historically high at 4.66, which aligns with the portfolios existing strategy.
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 6.24% and is an approximate $635k spend.
This portfolio, by virtue of the high yielding allocation, has a much shorter duration than the Conservative.
In the investment grade section of this portfolio, we made the same changes as above, particularly incorporating the new BPCE 2035c to replace the existing bond to improve yield and extend duration.
There were no notable AUD high yield issuances worth including, and the existing holdings remain stable with no need for replacements at this time.
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 7.11% and is an approximate $533k spend, demonstrating the concept of greater diversity in higher risk positions.
Higher-yield credit tightened over the past month across much of the portfolio’s foreign currency exposure. A notable portfolio change was the addition of the newly issued BNP Paribas 2035c Junior Subordinated AT1 bond, replacing the existing ING 2027c holding. Issued at the end of June, this switch enhanced the portfolio’s running yield to 8.209% and extended its duration to 2.535 years.
USD-denominated bonds continue to play a key role in the high yield portfolio, particularly as the Australian dollar has strengthened to 65 cents. This rebound has presented a timely opportunity to increase USD exposure, which remains a significant driver of performance across the portfolio.
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