Yields crept tighter over the month as a fragile peace agreement held in place between the US and Iran, somewhat reducing the risk of longer-term inflation. We added a new bond to the retail menu, and made changes to our Sample Retail Portfolio, which now yields 5.78%* for July. Here we provide an update for July.
With a peace agreement reached in the Middle East, and peace mostly holding, the price of oil lowered, and yields tightened as the risk of higher inflation somewhat eased. Central banks though globally continue to monitor the CPI data, and while the headline domestic print was lower than expected, the trimmed mean rose. The trimmed mean is the Reserve Bank of Australia’s (RBA) preferred measure and is seasonally adjusted and excludes the more volatile components such as petrol. Of more concern, the print showed there was broad based inflation, with a wider range of components showing strength and adding to inflationary pressures.
The Q3 inflation print will be more telling, and while there is risk of higher inflation, some economists have already called the top of the cycle. At most, there’s likely to be one more rate hike this year or none at all, and yet despite this outlook, yields remain elevated. With the view that rate cuts are likely in 2027 and 2028, it certainly makes current yields look attractive and allows bond investors to improve the credit quality of portfolios without sacrificing too much in returns.
We reviewed our Sample Retail Portfolio through this lens for the month, and added both a floating rate note, and a longer tenor bond- both of a stronger credit quality. With these changes, and the overall move in yields, the portfolio now yields 5.78%* for the month. We added the MyState Limited 2030 call Tier 2 subordinated floating rate note to the retail product offering, which pays an attractive coupon of 2.75% over the 3month Bank Bill Swap Rate (BBSW), providing a higher cash flow.
Here we provide an update on the Sample Retail Portfolio for the month of July.
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 5.78%* to maturity for the month, with 15 bonds and has approximately AUD209k invested.
We added the MyState Limited 2030 call Tier 2 subordinated floating rate note as to our portfolio, as we looked to improve the credit quality of the portfolio. Although the MyState 2030 call is not rated by S&P Global or Moody’s (which FIIG references across its systems), it is rated investment grade by Fitch. We exited our Judo Bank holding, which although it has a higher margin and projected yield, it’s rated sub-investment grade and recently the company announced a deterioration in three bad loans, which resulted to an uplift in provisions. While it is not systematic at this stage, the addition of MyState to the menu allowed us to exit and remove the risk.
We also switched out of our holding of LendLease’s senior unsecured 2031 fixed rate bond, which had a lower coupon (issued back during COVID-19 times when rates were at unprecedented lows), in favour of the Qantas senior unsecured 2034 fixed rate bond. We improved the credit quality, along with the cash flow (switching from a 3.70% coupon rate to 5.90%) and slightly extended duration which we’re comfortable with given the possibility of only one more rate hike to come.
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.