Longer-dated XTBs generally having higher yields, but also having higher interest rate risk (for fixed-rate XTBs). So, how do you select a portfolio that maximises yield and minimises interest rate risk?
You can’t have the absolute best of both worlds simultaneously, but it is possible to generate a portfolio with the maximum yield you can get for the minimum term to maturity. A Yield vs Maturity pay-off.
The quick way to do this is look at the out-performance of each XTB’s yield over the cash rate which can be done with a simple formula:
XTB YTM – Current RBA Cash Rate (1.75%)
Term to Maturity
Select XTBs by Yield vs Maturity
|ASX CODE||UNDERLYING BOND ISSUER||MATURITY DATE||COUPON TYPE||COUPON P.A.||INDICATIVE YIELD*|
|YTMF02||Bank of Queensland||07 NOV 2016||FLOATING||BBSW + 1.15%||2.221%|
|YTMCWN||Crown||18 JUL 2017||FIXED||5.75%||2.462%|
|YTMAZJ||Aurizon||28 OCT 2020||FIXED||5.75%||3.856%|
|YTMMG1||Mirvac||18 DEC 2017||FIXED||5.50%||2.634%|
|YTMLLC||Lend Lease||13 NOV 2018||FIXED||5.50%||2.8937%|
|YTMDOW||Downer||29 NOV 2018||FIXED||5.75%||3.374%|
|YTMIPL||Incitec Pivot||25 FEB 2019||FIXED||5.75%||3.170%|
|YTMAWC||Alumina||19 NOV 2019||FIXED||5.50%||4.881%|
* Data as at 06 JUL 2016
Then you can rank the results of that calculation as shown in the table below.
This gives you a very different portfolio with an average yield of 3.19%*
The average life is shorter as the XTBs with maximum yields for minimal term, come to the fore.
Other filters to narrow your selection
There are a number of other filters you can use to narrow your selection. Some of these include: