A month without data has kept the US market in limbo in terms of movements in yields.
This relative stability, albeit with a few headline-driven spikes, has allowed issuers to approach the market with confidence. According to Deutsche Bank research October was the busiest on record, led by a $30bn deal from Meta, which followed an $18bn deal from ORACLE in September. Both deals are to finance AI data centres.
We’ve seen this record play before, and it didn’t end well. Of course, time will tell if the AI capital expenditure boom sustains itself or not, but these are just staggering numbers.
Domestically the Q3 CPI numbers were unwelcomingly hot and resulted in rate cuts being almost totally priced out of the market, and yields rose across the curve in response. The RBA expects no further cuts in this cycle although they are slightly out of consensus.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 5.56% and consists of ten bonds of roughly equal weight by value to total an approximate $515k spend.
We participated in three new issues this month, although only one was rated investment grade and so considered for inclusion in the portfolio.
Patrick Terminals, a wholly owned subsidiary of ASX listed QUBE, is a genuine corporate issuer, which we always like to offset the market skew towards the financial sector.
The order book was again very well oversubscribed, with ~$2.7bn of demand for the eventual $600m issue, that was split $250m/$350m across 7 and 10-year tranches.
With such a large order book, spreads were brought in from initial guidance on the 10-year we participated in from +165 to final pricing at +145 over swaps, for a yield of 5.549%. Unfortunately for the portfolio, the one notch upgrade to credit rating wasn’t enough to oust the AGL bond as the yield reduction of 8 basis points (bps) isn’t what we are looking for.
We retain the EDF bond in the portfolio with its longer duration but are keeping a close eye on the French government situation given EDF is wholly owned and disruption there could impact the price considerably it if goes against us.
There is a dearth of attractively valued asset backed bonds around at the moment. As a result, we switched out the Grow ABS note for the relatively recently issued IAG 2032c floating rate note for a 0.60% increase in yield while keeping the same rating.
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 33% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 6.14% and is an approximate $550k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative portfolio.
The two sub-investment grade bond issued in the month were from Lendlease, the listed construction firm, and RAM (Real Asset Management). Lendlease are part way through a business transformation and issued this bond to flex their funding arrangements from a bank facility, providing a strong expectation of this bond being called in three years and good relative value, with franking available for eligible investors.
This pushed the grossed-up yield well above 7%, and as most clients can use franking, we have included it in the portfolio at the expense of the Pacific National subordinated bond, as we don’t want to be overweight with lower ranked and rated corporate hybrids.
RAM issued a listed bond backed by Australian residential mortgages. While nothing is attractive in the investment grade space, however since it is listed this note is unrated and so can be included in this portfolio.
Listed bonds are a new development for FIIG as a result of the acquisition by AUSIEX, and this new bond came at an opportune time. With significant over-collateralisation and credit enhancement, the yield of BBSW +3.00% was very attractive. We switched out Emeco, which looks like running their bond to maturity in light of takeover rumours.
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 17 bonds, yields 6.72% and is an approximate $500k spend, demonstrating the concept of greater diversity in higher risk positions.
We also added the Lendlease and RAM bonds to the portfolio as above.
We switched out the Heartland bond as we mentioned last month due to its lower yield but retained Emeco and the Pacific National bonds as this is a higher risk, higher return portfolio.
Instead we took out the Judo bond we put in last month due to its good performance and now lower yield.
With credit spreads currently pretty tight, we need to find the best risk-adjusted yields we can whilst staying true to the high yield target of this portfolio.
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