Investing

Selecting XTBs based on Yield to Maturity

Selecting XTBs by YTM

A basic approach to portfolio construction is to rank the bonds or XTBs by yield and pick the top yielding ones.

For example, the top 8 XTBs would make a portfolio with an average yield of 3.87%*

ASX CODE UNDERLYING BOND ISSUER MATURITY DATE COUPON TYPE COUPON P.A. INDICATIVE YIELD*
YTMAWC Alumina 19 NOV 2019 FIXED 5.50% 4.881%
YTMDOW Downer 11 MAR 2022 FIXED 4.50% 4.044%
YTMQF3 Qantas 19 MAY 2022 FIXED 7.75% 3.884%
YTMAZJ Aurizon 28 OCT 2020 FIXED 5.75% 3.856%
YTMQF2 Qantas 11 JUN 2021 FIXED 7.50% 3.792%
YTMLL1 Lend Lease 13 MAY 2020 FIXED 6.00% 3.602%
YTMQF1 Qantas 27 APR 2020 FIXED 6.50% 3.555%
YTMIPL Incitec Pivot 21 FEB 2019 FIXED 5.75% 3.374%
* Data as at 06 JUL 2016

This approach doesn’t take any other factors into account.

As you’ll see there is a wide range of available yields, and a general relationship between yield and tenor, or time to maturity. Longer dated bonds usually have higher yields than shorter dated bonds of the same credit quality.

The wide range of XTBs creates an investment choice:

  • Do we just pick the top 8 or 10 from the list ranked by yield?
  • Or should we also consider other factors like credit risk, or interest rate risk and take time to maturity into account?

Plotting yields versus maturity dates shows you the general relationship between yields and term to maturity (While these bonds are all investment grade, there will also be some differences between the yields, because of the different credit ratings of the issuers. For example, NAB is a lower credit risk than Qantas).

XTB YTM vs Maturity Date scatter chart

YTM Scatter

Other ways to narrow your selection

There are a number of other filters you can use to narrow your selection. Some of these include:

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