Uncertainty sums up markets at the moment, given the conflict in the Middle East and the rate outlook, but a bond portfolio offers a certain income stream. With the move in yields, the Sample Retail Portfolio now yields 5.92%* indicatively. Here we provide an update for April.
Markets have continued to ride the escalation and de-escalation of rhetoric exchanged between the US and Iran, with yields moving in response. While more recently yields have tightened on the view that economic growth will be limited due to energy supply constraints caused by the war, overall there has been a significant shift higher in yields. This has meant that investors have been able to move into higher quality bonds without sacrificing yield.
Our Sample Retail Portfolio reflects this, which this month yields 5.92% to its assumed maturity date, up from 5.64% last month, and with an 84% allocation to investment grade bonds. The portfolio also holds some inflation protection, through the Sydney Airport 2030 Capital Indexed Bond and Royal Women’s Hospital Indexed Annuity Bond (IABs). The payments on these types of bonds increase when quarterly inflation prints higher. Not all asset classes can offer a return that keeps pace with inflation.
With uncertainty around the Reserve Bank of Australia (RBA) rate path, we continue to look for opportunities to add floating rate notes to the retail product offering. This month two opportunities presented, with the likes of an IAG 2032 call Tier 2 floating rate note and also the Liberty 2030 senior unsecured floating rate note. Of which we added the latter to the portfolio. With the 3-month Bank Bill Swap Rate (BBSW) increasing with views of a higher cash rate, this will flow through to higher coupons on floating rate notes, providing an improved cash flow.
Here we provide an update on the Sample Retail Portfolio for the month of April.
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 5.92%* to maturity for the month, with 15 bonds and has approximately AUD207k invested.
With the current backdrop, we’re favouring good diversification across the portfolio to ensure we’re positioned no matter the market conditions. With the potential for further yield moves higher and additional rate hikes beyond what is already priced in, we’ve been looking to add floating rate opportunities. The new Liberty Financial, which has a larger margin compared to some existing investment grade floating rate notes in the retail space, pays a coupon of 2.05% over the 3month BBSW. Its current coupon is set at 5.854%, providing a higher income stream.
To make room for the addition of this bond, we exited the Transurban 2031 fixed rate bond, which paid a 3.25% coupon. Allowing us to reweight the portfolio to a floating rate exposure, which reduced the duration and improved the running yield.
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.