Portfolio Strategy

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Portfolio Strategy Commentary - 20th June 16 (Incorporating Best of Bonds)

by User Not Found | Jun 20, 2016

FIIG Securities is licenced to provide general advice only. As such, your personal circumstances have not been considered in this or any other communication.

Please note: if you wish to forward this offer list to retail clients, please be aware that ASIC prohibits the disclosure of credit ratings to retail investors, and contact us directly for a version of this communication which does not include ratings

Overseas News:

  • US Fed member Bullard (St Louis Fed president) has toned down his thoughts on further US rate rises saying he favours just one more rise in 2016. Stocks closed mixed on Friday with European shares +1% and US shares down 0.33%.
  • US housing starts fell 0.3% in May, although permits to build increased which should lead to improved numbers ahead.
  • Brexit takes centre stage this week with the vote having repercussions for risk and capital on a global basis. Results should be known during Friday’s Australian trading session.
  • Brexit polls slightly favour the Remain vote, with the Remain camp appearing to have received some benefit from the murder of the UK MP Jo Cox. Cox was an ardent supporter of remaining in Europe.
  • Greece received further aid with Eurozone officials agreeing Friday to fresh loans totalling 7.5bn Euro

Credit indices spreads are slightly higher over the last week with the US Investment Grade Index (IG) finishing yesterday at 82.8bps, 1 bp wider over the week. The US High Yield Index (HY) increased 8bps to finish yesterday at 452.5bps.

As a reminder, the IG index is comprised of the Credit Default Swaps of 125 equally weighted names whereas the HY is comprised of 100 non-investment grade names. Changes in them are reflected in prices of securities of varying credit quality.

US government bonds are unchanged on the week at 1.645% for the 10 year. 10 year Japanese government bonds trade at negative -0.14% and 10 year German Bunds trade at + 0.02%

On Tuesday and Wednesday, Fed Chair Yellen presents a six monthly testimony to Congress on monetary policy. Fed watchers will be hoping for a sign of when the Fed may next raise rates.

Domestic interest rates are a little higher over the last week, with the AUD 3 and 10 year swap rates currently at 1.82% and 2.32% respectively. The Australian iTraxx is at 129.5bps basis points (or 1.295% for this index of 25 Australian Investment Grade names), which is 1 bp higher on the week. 10 year AUD government bonds are at 2.10% and the RBA releases minutes from its June meeting tomorrow.

In terms of portfolio construction, we remain heavily in favour of Fixed rate bonds. Our Inflation Bonds preference has altered slightly to be weighted in favour of Indexed-Annuity Bonds (IABs) over Capital Indexed Bonds (CIBs) – both securities will always pay a margin over inflation, except in a deflationary YoY environment where IABs will outperform given the annuity payments cannot fall. We see deflation as unlikely but this is an easy way to manage risks to the downside.

We remain underweight in Floating Rate Notes, but include them for diversification where the credit margin earned over BBSW seems sufficient.

Yields have contracted below 4.00% on the Swiss Re Fixed securities but we still have some supply above 4.00% yield of the Swiss Re Floating securities for Wholesale investors able to invest $100 000 AUD. As a reminder, these securities are callable in May 2017.

Examples of our ‘Best Bonds on Offer’ are shown below. 

Fixed Rate

Security Issuer Security Type Sector Rating Retail Maturity Date Mat / Call Date Yield Minimum Parcel
SWISSRE-7.635%-25May17c Elm Bv (Swiss Rein Co) Fixed Coupon Bond Insurance A No 00-Jan-00 25-May-17 3.444% 100,000
Glencore-4.50%-19Sep19 Glencore Australia Holdings Pty Ltd Fixed Coupon Bond Resources BBB- No 19-Sep-19 19-Sep-19 5.261% 10,000
AdaniAbbot-6.10%-29May20 Adani Abbot Point Terminal Pty Ltd Fixed Coupon Bond Infrastructure BBB- Yes 29-May-20 29-May-20 8.623% 10,000
CBL-8.25%-17Apr19 CBL Corporation Limited Fixed Coupon Bond Insurance NR Yes 17-Apr-19 17-Apr-19 6.130% 10,000
PRAECO-7.132568%-28Jul20c Praeco Pty Ltd Fixed Coupon Bond Infrastructure Baa2 Yes 28-Jul-22 28-Jul-20 4.348% 10,000

Floating Rate

Security Issuer Security Type Sector Rating Retail Maturity Date Mat / Call Date Yield Minimum Parcel
SWISSRE-BBSW+1.17%-25May17c Elm Bv (Swiss Rein Co) Floating Rate Note Insurance A No 00-Jan-00 25-May-17 4.32% 100,000
AAI-BBSW+3.30%-18Nov20c AAI Ltd Floating Rate Note Insurance BBB+ No 18-Nov-40 18-Nov-20 4.646% 10,000
DickerData - BBSW+4.40%-26Mar20 Dicker Data Limited Floating Rate Note Other Corporate NR Yes 26-Mar-20 26-Mar-20 6.118% 5,000
MEBANK-BBSW+2.70%-29Aug19c Members Equity Bank Pty Ltd Floating Rate Note Regional Bank BBB- No 29-Aug-24 29-Aug-19 4.679% 10,000
G8-BBSW+3.90%-3Mar18 G8 Education Limited Floating Rate Note Other Corporate NR Yes 03-Mar-18 03-Mar-18 6.059% 10,000

Inflation Linked

Security Issuer Security Type Sector Rating Retail Maturity Date Mat / Call Date Yield Minimum Parcel
SYDAIR-ILB-3.12%-20Nov30 Sydney Airport Finance Inflation Linked Bond Infrastructure BBB Yes 20-Nov-30 20-Nov-30 CPI + 3.36% 10,000
RWH-IAB-0%-30Jun33 RWH Finance Pty Ltd Index Annuity Bond Infrastructure Baa2 No 30-Jun-33 30-Jun-33 CPI +3.48% 10,000
AGN-ILB-3.04%-20Aug25 Australian Gas Networks Inflation Linked Bond Energy AA Yes 20-Aug-25 20-Aug-25 CPI +2.46% 10,000
Praeco-IAB-0%-15Aug20 Praeco Pty Ltd Index Annuity Bond Infrastructure Baa2 Yes 15-Aug-20 15-Aug-20 CPI + 2.40% 10,000
MPC-IAB-31Dec25 MPC Funding Ltd Index Annuity Bond Infrastructure AA No 31-Dec-25 31-Dec-25 CPI + 2.23% 10,000


Floating rate note yields are subject to BBSW rate-set estimations and inflation product uses an implied CPI assumption of 2.5%.

Leigh Winton 
Portfolio Strategy Services
D +612 9697 8759 

George Whittle
Portfolio Strategy Services 
D +612 9697 8720

Marisa Geurts 
Portfolio Strategy Services 
D +617 3231 6676


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