It was a tale of two markets in August as domestically we basically stayed straight on, with the RBA cutting rates for the third time as expected, and fully priced, by the market.
This dullness allowed some issuers to come to the market with some attractive new bonds as with conditions being so boring it gives confidence that pricing will stay as expected through the bookbuild process.
According to Deutsche Bank, Australia has now become the third largest issuance market in the world after the US and Eurozone. This is quite astonishing given we are the 13th largest economy, which reflects our disproportionately large savings pool of superannuation and the much-increased willingness of investors to allocate to AUD as well as different structures.
For example, ANZ became the first bank to issue a 20-year bullet (hard maturity with no earlier call dates), and EDF, the French electricity utility followed it up with only the 3rd ever 20-year corporate bond, and the first for many years.
Monday the 1st of September was Labor Day in the US which traditionally marks the end of the summer holidays and so we can get back to more normal trading conditions.
IN the US in August weaker inflation data pushed the market to price in more rate cuts from the Fed, and when these were all but confirmed by Fed Chair Powell at his Jackson Hole speech, lower yields consolidated in the shorter end of the curve. Longer term 30-year yields however rose over the month given rising concerns about the Fed’s independence and therefore their ability to keep inflation under control, steepening the curve.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.44% and consists of ten bonds of roughly equal weight by value to total an approximate $500k spend.
As mentioned above, there were some good quality new issues in the month with attractive yields. The two 20-year bonds priced with higher yields as you would expect for the extended tenor, and although we are wary of the much higher duration risk, the coupons above 6% when almost all other investment grade bonds are below that level made us include them in the portfolio.
There were two other issues of interest. Dyno Nobel (previously Incitec Pivot) refinanced their upcoming maturity with 7½ and 10-year bonds, pricing at 5.40% and 5.817% respectively.
Being a genuine corporate which offers excellent sector diversity – there aren’t many explosives companies in the world – these bonds were hugely sought after and are now priced too tight to warrant inclusion in the portfolio.
The final new issue was a 10-year senior bond from HSBC, which with an A- rating looks attractive still at a yield of 5.5%.
We included the ANZ, EDF and HSBC bonds in the portfolio in place of the Qube, Port of Newcastle and NAB bonds. This increases both duration of the portfolio (from 4.79 to 5.77) and the allocation to the financial sector, which we had been looking to reduce, but in this case we think the senior ranking of the HSBC bond warrants this versus the sectoral diversity of the non-financial bonds that are lower rated.
The average rating of the portfolio now sits in at A- which gives us a conservative outlook on the credit front with spreads continuing to tighten.
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 15 bonds, yields 5.93% and is an approximate $595k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative.
We made the changes as above in this portfolio.
CEFT have called their bond early and it will be repaid this month.
In the absence of any AUD denominated high yield, we will take the cash and sit on it until something attractive comes to our attention in either the secondary or primary markets.
With the addition of the two longer 20-year bonds we will consider switching out the NSW government bond for something shorter and higher yielding, as we can lower duration (interest rate risk) and increase yield by doing so.
We will wait for subsequent months before acting though as we see how the relative Australian weakening economy and US longer end decoupling on loss of confidence issues begin to work themselves out in terms of long end pricing.
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 16 bonds, yields 6.75% and is an approximate $470k spend, demonstrating the concept of greater diversity in higher risk positions.
As noted above, we have removed the CEFT bond due to its early call.
With the French government unable to currently legislate a budget and the Prime Minister having called a vote of confidence in the government for later this month we are monitoring the situation on credit spreads from French issuers.
Currently these have widened modestly and are not at a level that would concern us, however situations like this can escalate quickly so we will keep our eye on the SocGen 8.50% 2034c AT1 in particular, which is the most exposed in this regard in this portfolio.
The current 7.4% income from the portfolio gives us patience to wait for the right opportunity.
To view and download our Sample Portfolios, please click here.