July has been very quiet compared to the earlier months in the year, mainly as we are in the period where large listed companies are preparing their accounts for the previous financial year.
There has been plenty of news flow around the gulf conflict but precious little in the way of resolution, with tit-for-tat minor attacks increasing towards the end of the month, bringing with them increased volatility, particularly in the oil price. Aside from this the AI thematic has also been hugely volatile, with massive US bond deals ($25bn+) and huge moves in chip related equities, making decision making tricky.
Domestically, data supported the RBA’s decision to hold on further rate hikes beyond the three already delivered this year, as a softer labour market report and Q2 CPI print validated the current watch-and-wait strategy. Rates however drifted up a few bps over the month, but changes were only minor.
The US was in similar territory in terms of the Fed’s rate decisions as they also held rates steady, but with three dissenting votes the new regime of Chair Warsh has challenges to establish itself as a credible inflation fighting institution whilst balancing the political pressure to keep rates low(er).
There was one interesting new issue that stood out in a pretty bare field.
Conservative portfolio:
This portfolio is all investment grade and all AUD.
The current portfolio yields 6.25% and consists of ten bonds of roughly equal weight by value to total an approximate $510k spend.
The only remotely interesting new issue in the month available in size was a senior secured bond from CDC Data Centres, following on from their subordinated issue the previous month. Rated one notch higher, despite the tenors being longer at 6- and 10-years vs 5 and 7, the yields were lower.
As we like the issuer, we retained the subordinated notes in the portfolio, preferring the medium tenor of 7 years and higher coupon and yield for just one ratings notch lower.
Waiting for the results to be released of the larger likely new issuers is an interminable grind, but with a healthy running yield of 6.29% we are in the fortunate position (as in all of the portfolios) to be able to wait out such periods whilst receiving a good income regardless of movements on the capital front.
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 39% of the total portfolio) to reflect their riskier nature.
The current portfolio has 15 bonds, yields 6.76% and is an approximate $590k spend.
This portfolio, by virtue of the high yielding allocation, has a shorter duration than the Conservative portfolio.
No changes for the month in this portfolio either, but as I go to press there is a mandate for a new high yield bond which looks interesting so stay tuned for next month.
The running yield on this portfolio is 6.88%, which when compared to the yield to maturity of 6.61% shows the strength of the income generation achieved by adding judicious high yield exposure to a Conservative portfolio.
WA Stockwell will mature during August so we will need this new bond to replace what has been an excellent performer to date and hopefully will come with a higher coupon given the WA Stockwell was issued just prior to COVID when rates were a lot lower.
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 15 bonds, yields 7.16% and is an approximate $460k spend, demonstrating the concept of greater diversity in higher risk positions.
As mentioned above, we are awaiting a new high yield bond. Given the portfolio is searching for new additions, the redemption of WA Stockwell doesn’t come at a particularly good time, but there is never a bad time to be repaid your capital in a high yield bond.
We continue to scour the market for bonds that yield more than 7% that also fit our risk appetite, and that is a very difficult task at present.
We are aware that there are four bonds in the portfolio that yield less than 6.5%, but with new prospects so scarce we think the diversification benefits they offer by keeping them in outweigh their lower yields for now, but we will keep our beady eyes peeled for more opportunities.
The running yield of 7.65% helps us to be patient.
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