As we begin the new year, the Sample Retail Portfolio now yields 5.56%* to the maturity date, showing how attractive yields are in the fixed income space. Noting the portfolio has an 84% allocation to investment grade bonds.
Last year ended with a flurry of debate and repricing around the cash rate outlook, as markets changed expectations of a further rate cut down the track from the Reserve Bank of Australia (RBA) to the potential for a rate rise. This has gained further momentum with fixed income markets now pricing in just under two RBA rate rises for this year.
Yields as a result have remained elevated, and what’s interesting about this, and our Head of Research Philip Brown discusses in the recent Macro Outlook, is that yields are currently higher than where they were when the cash rate was at its recent peak of 4.35%. Noting we’ve had 75 basis points (bps) of cuts since then. Certainly, an opportune time to be adding to fixed income portfolios (or building one if you’re new to the asset class).
There were changes made to the Retail Sample Portfolio for the month, with the addition of the Qube 2034 senior fixed rate note to the retail product offering. Noting this is one of the higher yielding retail bonds available.
Here we provide an update on the Sample Retail Portfolio for the month of January.
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.
The portfolio is expected to yield around 5.56%* to maturity for the month, with 15 bonds and has approximately AUD207k invested.
As mentioned, we added the investment grade Qube 2034 senior unsecured fixed rate bond to the Retail Sample portfolio for the month. The bond pays a 5.90% semi-annual coupon and is indicatively yielding at time of writing around 5.69% to the assumed maturity date. This provides a nice pick-up in yield compared to some existing holdings in the portfolio, and as such we switched out the older Banco Santander SA 2031 holding to make room.
In favour of having a slightly larger allocation to the Qube holding, we also trimmed down the Pacific National 2031 holding to increase the exposure to Qube. While we have no credit concerns with Pacific National, the company is currently undergoing a transformation to improve the company’s credit profile. While it so far has made positive progress, there remains execution risks.
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.