On renewed hope a peace agreement remains close, yields were relatively stable over the month, and the Retail Portfolio yields an attractive 5.86% for June. Here we provide an update on the Retail front for the month.
Although a whole month has passed since our last Sample Retail Portfolio update, and a peace agreement between the US and Iran wasn’t reached, markets over the month remained stable. In fact, new issues coming to market returned to their standard two-day launch timeframe, rather than rushed through in one-day, as had become the new norm since the conflict began to minimise market volatility.
The biggest concern lingering in markets is the possibility that inflation will remain persistent long after a peace agreement has been signed, due to the impact of oil prices and secondary impacts. With that, longer tenor bond (10-year and beyond) yields moved higher mid-month, where previously most of the yield movement had been in the shorter-end of the curve on the expected outlook for central banks.
Although the domestic inflation print last month came in slightly softer than expected, it was largely driven by volatile components. In contrast, underlying inflation was firmer, with the trimmed mean (the Reserve Bank of Australia’s [RBA] preferred measure) broadly in line with expectations. Looking through this volatility, the signal remains that underlying inflation is sticky. In fact, the trimmed mean accelerated slightly, and more persistent components of the basket (including construction and services) continue to show strength. This reinforces the view that while headline inflation is moderating, broader price pressures remain elevated and widespread, as shown in the chart below.
Australia’s April CPI data release
Source: FIIG Securities & ABS
Our Sample Retail Portfolio this month yields 5.86% to its assumed maturity date, and with an 84% allocation to investment grade bonds. There were no new bonds added to the Retail menu for the month, although there were two bonds that redeemed, issued by Liberty Financial and AirServices. With noteholders receiving their final coupon payment and capital back, they have been reinvesting to maintain the returns and income stream those allocations provided. With yields remaining elevated, this has assisted with this.
Here we provide an update on the Sample Retail Portfolio for the month of June.
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 5.86%* to maturity for the month, with 15 bonds and has approximately AUD207k invested.
With no new bonds added to the menu for the month and the current portfolio still providing an attractive return for its investment grade allocation, we made no changes to the portfolio. This is true of a bond portfolio, where once it’s constructed it’s a matter of tweaking the positions where need be, and not at all if there’s no reason for it.
With lingering inflation concerns and an uncertain RBA outlook, we continue to look for opportunities to improve diversification in the portfolio. The prior month we reduced our exposure to bonds in the financials sector with the inclusion of the Arc Infrastructure WA Pty Ltd 2031 maturity senior secured fixed rate bond. While the RBA is expected to further increase rates at some stage this year, following this, there could be a period of rate cuts. As such, a split between floating rate notes, fixed and inflation bonds is important.
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.