The Reserve Bank of Australia (RBA) surprised markets with a rate hike this month, sending yields into a short-term flutter. We made changes to the Sample Retail Portfolio, which now yields 6.01%*. Here we discuss the changes made to the Sample Retail
Portfolio for the month of May.
Retail Update
While the RBA took a breather on rates last month, it was short-lived, increasing rates by 25 basis points in May to 3.85%. The central bank has refocused on taming inflation ‘in a reasonable timeframe’. Inflation came in lower for the March quarter, although remains elevated at 7% year-on-year.
Markets were quick to reprice the rate hike, having widely expected no change for another month. Despite the rollercoaster, market yields have retraced tighter than pre-meeting.
US regional banks were back in the spotlight with the bailout of First Republic by JP Morgan and although there has been no impact locally, the broader market volatility creates opportunities.
Locking in a steady regular income, the Sample Retail Portfolio yields 6.01%* for the month, following some changes and new bonds added. Given the uncertain backdrop, we have a larger 95% allocation to investment grade bonds. Due to their defensive nature,
these bonds generally perform well in times of market stress, offering better capital price stability.
Over the month the below additional bonds were added to the retail product offering:
- CBA-4.946%-14Apr27c Tier 2 Subordinated notes
- CBA-BBSW+1.90%-14Apr27c Tier 2 Subordinated notes
- LibertyFin-BBSW+3.10%-05Apr27 Senior unsecured
- SUNCORP-BBSW+2.30%-01Jun27c Tier 2 Subordinated notes
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio, where we include a mix of investment grade and selective higher-yielding exposures while still maintaining a balance between risk and return, skewed towards preserving capital rather than chasing yield.
It aims to have around 10 positions, with the higher yielding bonds in smaller parcel sizes to reflect their assumed higher risk. Currently the portfolio holds 14 bonds, which provides better diversification.
The portfolio yields an indicative 6.01%* to the assumed maturity dates and is an approximate $203k spend.
With the Liberty Financial 2027 being made available to retail clients, we’ve added this to the portfolio, switching out of the shorter dated 2026 line. This provides the portfolio with a higher cashflow, paying a margin of 3.10% over the 3M Bank
Bill Swap Rate (BBSW) as the margin on the 2026 notes is 2.55% plus 3M BBSW.
The CBA 2027c Tier 2 subordinated fixed and floating rate notes were also made available to retail clients, providing portfolios with a strong credit and attractive return. We added the CBA 2027c floating rate notes, switching out of the Bendigo and Adelaide
2026c Tier 2 subordinated floating rate notes to make room.
While the Bendigo and Adelaide notes are trading at a discount to their face value, the CBA notes are at a premium. We already hold an exposure to a regional bank (Bank of Queensland) and prefer the major bank allocation for diversification, and also
the better cash flow the CBA notes offer.
We also reduced our holding while executing the switch, moving from $20K face value, into $10K face value, which has reduced our floating rate exposure slightly. This is with the view rate hikes are mostly priced in and we favour locking in returns on
offer from fixed rate bonds, which is now a larger allocation in the portfolio.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Fact Sheets from our FIIG Credit Research Team on each bond), can be found on the FIIG Website here.
Please note the indicative yield shown is the expected yield to the assumed maturity/call dates of the bonds included in the portfolio.