With new bonds becoming available for Retail, we’ve made changes to the Sample Retail Portfolio for this month and discuss how we’re positioning the portfolio for the upcoming months.
The Reserve Bank of Australia (RBA) lowered the cash rate by 25 basis points (bps) this month, which was widely expected, although the tone was less hawkish than anticipated. Although noting the RBA was more restrained in raising rates in the tightening cycle, it doesn’t need to rush easing, at this stage. The RBA is still favouring a wait-and-see approach to further rate cuts, relying data to set the path, but markets have another three rate cuts priced in for this year until Christmas.
Over the month there has been some softer data out of the US, including Payrolls, and the ISM data showed a fall in the headline services index and services employment but a rise in prices paid. This could point to the tariffs starting to take effect and there could be ongoing stagflationary tendencies. However risk assets are holding on to near highs, which don’t seem to be supported by fundamentals.
With the current rates outlook, the Australian government bond yields have drifted tighter since the start of this month. Both the 5-year and 10-year yields are lower, with the latter compressing about 5bps at the time of writing (and more in the short-end of the curve). This builds a case to exit shorter dated bonds, as rate cuts expected this year are already priced in (and accounts for some of the changes we made to the portfolio for this month).
There’s been a rush of new issuance of late, with ANZ issuing two new Tier 2 subordinated notes, a 15-year non-call 10-year note and a 20-year bullet maturity. The latter is the first Tier 2 issuance of its kind term of tenor and structure for a Major Bank Tier 2 subordinated note.
While no new retail bonds were added to the product offering over the month, as mentioned there were a few changes made to the retail portfolio over the month, in an effort to improve returns and also consolidate the portfolio holdings. Here we further discuss these changes.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, designed to offer an appropriate level of risk with return. Overall, it remains more skewed towards preserving capital rather than chasing yield.
With the changes we’ve made to the portfolio for this month, the expected yield to maturity is currently around 5.13%*, which is an improvement from the prior month and in spite of yields moving tighter. The portfolio has approximately $206k invested.
In last month’s portfolio review we mentioned our intention to consolidate the number of holdings within the portfolio, while also keeping a good amount of diversification. It’s with this in mind that we replaced AUD10K of the CBA Tier 2 subordinated 2033 callable note and AUD10K of the ANZ Tier 2 subordinated 2033 callable note with the newest retail available bond, the ANZ Tier 2 subordinated 2034 callable note. We made this a AUD20k exposure, achieving a higher expected return, adding only a year longer in tenor and remaining in a fixed rate note of the same credit quality.
Another thematic we’ve spoken about recently, is exiting shorter dated bonds that offer lower yields, and reinvesting into longer dated exposures that typically offer higher yields, often referred to as rolling down the curve. We discuss the premise behind this strategy at length in our article in this week’s edition of The Wire. As such, with only two years left until the Liberty 2027 floating rate note (FRN) is due to mature, we have exited this position and replaced it with the Liberty 2029 FRN. Once again, a better expected return while keeping the credit quality the same.
While we don’t have any concerns with the outlook for Qantas, and enjoyed the larger coupon (and hence income stream) the Qantas 2030 fixed rate bond provided the portfolio with, it’s yield was the lowest in the portfolio and there are better options. One of the higher yielding senior debt corporate bonds in the portfolio was the Lendlease 2031, which we already held a AUD10K allocation of, so we increased this to AUD20k. This improved the returns, once again with only a year extra in term, and also reduced the number of holdings in the portfolio. We now have 17 exposures, instead of 20, and will look for opportunities to further consolidate this. Furthermore the portfolio’s running yield has only slightly dropped.
We continue to favour high-quality credit for the portfolio, with selective and smaller allocations to high yield exposures.
The Sample Retail Portfolio, along with the full list of retail available bonds, can be found on the FIIG Website here.Factsheets are also available via MyFIIG.
*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.