The last six weeks or so has had it all, from central bank meetings, escalated geopolitical unrest, and a drip of stimulus measure from China. If anything, all of these events serve a good reminder to us about ever changing dynamics across the globe and within economies. One of the favourite sayings of those that work in financial markets is “Past performance is no indication of future performance.” September is historically one of the worst months for equity markets, but in 2024, it was anything but. And the rally can be narrowed down to the US Federal Reserve meeting.
The FOMC delivered a 50bp rate cut, noting it is happy with the progress on inflation but wants to keep the labour market in the solid position it currently is. Future rate cuts are likely to be more gradual from here, especially considering the continued slowdown in CPI and strength in the labour market. The 50bp cut was done to secure a soft landing and remove the prospect that the jobs market could worsen significantly from here. The FOMC next meets in early November.
In Australia, the RBA met and did very little: rates were left on hold and nothing new was said. This isn’t because the situation is clearer, but because there is no need to keep repeating themselves. As it stands, the party line is that in the near term, the board does not see interest rate cuts, especially as the labour market remains in a good position, and in fact strengthened in the September print.
In this edition, we did not add any new bonds to the retail menu, though we did add a new one to the Sample Portfolio, which we explore below.
Retail Sample Portfolio
The Sample Retail Portfolio is a balanced portfolio whereby we aim to weigh an appropriate level of risk and return. This is particularly relevant in light of the current market dynamics where yields on highly rated bonds are falling. Overall, it remains more skewed towards preserving capital rather than chasing yield. It aims to have 20 positions.
We added the Dexus 2032 fixed rate notes and removed the Judo Bank 6.40% 2025 bond. While an exposure to Australian REITs at this juncture may seem unwise given all the negative press about the sector, we still believe some exposure to the right company can add value to a broad and diversified portfolio. Dexus’ recent results had some neutral-to-positive signs from a credit perspective, notably the large number of divestments made and an adjustment to its distribution policy. The intention of these measures was to provide more capital and flexibility to invest through the cycle, mitigate headwinds, and shore up its balance sheet.
The running yield of the current portfolio was around 5.34%*, and the Portfolio is an approximate $204k spend. The average yield remained lower compared to previous years, and even to the start of this year, mainly on account of rate cut expectations and tightening credit spreads. Rate cuts have since occurred and with more to come, it is likely that yields on most bonds will remain at similar levels or continue to fall. As we wrote last month, Australia is an outlier in terms of its interest rate cycle. Amassing duration is still a viable strategy, because if you wait until the RBA actually cuts rates, the market will have already moved since lower rates are priced in. But short-dated floating rate notes could also be considered, as the RBA looks set to remain on hold for another few months.
The Sample Retail Portfolio, along with the full list of retail available bonds (and Factsheets 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, based on swaps rates at the time of writing.