With renewed conflict in the Gulf region, markets repriced the risk of inflation, shifting yields higher. Added by some changes we made to our Sample Retail Portfolio, its overall yield is much higher, now at 5.88%*. Here we provide an update for August.
Over the month the fragile ceasefire between Iran and US didn’t hold, with renewed conflict in the region and a formal peace agreement seemingly further away. With this, oil prices crept higher again, and markets started to price in higher inflation. Yields were up again over July, although have slightly wound-back for the start of August. With the risk of persistent inflation, markets also priced in a higher possibility of rate hikes for central banks. The US Federal Reserve (Fed) held rates unchanged when it met, although the 2-year yield was slightly higher (which is directly linked to monetary policy), indicating that markets felt the Fed made the wrong policy decision.
Closer to home, the CPI print was below the RBA’s forecast, though it is still above the Board’s inflation target of 2.5% and does not rule out another potential rate hike this year, in our view. With this uncertainty we favour a diversified bond portfolio, which will perform well no matter what the outcome is.
We added a new bond to the retail product offering for the month, with the senior secured Port of Newcastle 2033 bond coming on board, and available at a yield around 5.80% to maturity. With yields higher, there are attractive higher returns on offer, even from senior secured investment grade bonds.
Here we provide an update on the Sample Retail Portfolio for the month of August.
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 5.88%* to maturity for the month, with 15 bonds and has approximately AUD209k invested.
With the new available Port of Newcastle (PON) 2033 senior secured bond, we added this to the portfolio for the month. To make room for it, we replaced our holding of Arc Infrastructure WA Pty Ltd 2031 senior secured bond. We have no credit concerns with this bond, however being one of the lower yielding positions in the portfolio we favoured exiting it in place of the PON bond. This switch improved our overall portfolio return, while we remained in an industrials/infrastructure exposure.
We also extended the portfolio duration by about two years, and with the possibility of only one more rate hike this year, we’re in favour of incrementally adding selective duration to portfolios. Longer dated bonds typically perform well when yields shift lower ahead of anticipated rate cuts, with the capital price appreciating, all else being equal.
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.