Investing

Bond Bites April 2019

  • 16.APR.2019
  • Simon Riordan,  XTB

XTB Sales Director, Simon Riordan talks with CIO, Ian Martin

Ian explains what’s behind the recent performance of the Concentrated High Yield Portfolio. He also takes us through the Maturity Ladder portfolio returns and who this portfolio could be of interest to. Simon asks Ian what his view is for the next twelve months and the pros and cons of floating rate bonds vs fixed rate.

Note: The Concentrated High Yield Portfolio appears in the Cash Flow Tool and Retail Starter Portfolios, as the High Yield Portfolio. 

Simon

We’re here today with Ian Martin our Chief Investment Officer, to have a chat about the XTB portfolios. There’s been some big performance numbers out you might have seen 9.8% total return p.a. for the Concentrated High Yield Portfolio. View portfolio performance.

So Ian, big numbers.

Ian

Yes, look we’ve obviously been very pleased with the performance of the portfolios. These are quite significant returns that we’ve seen on the Concentrated High Yield portfolio.

But, investors should be conscious that the CHY portfolio we select the highest yielding XTBs we can. And they are often the longest dated XTBs. So, we have 6-year to 8-year maturity. So those portfolios have benefited from the falling interest rate environment.

Simon

So, mostly capital growth, rather than income coming through?

Ian

Very, very much so. That’s obviously accelerated returns, because of the interest rate environment that we’re in.

How do you see that going forward in the next twelve months?

Ian

Look, certainly the ‘doves’ – the people who think interest rates are going down – are in control of the market. The market really seems to be responding to bearish news about the economy, which is good for the bond market. But, I think we should be cautious.

Nearly two 25 basis point cuts are priced in by the market. And we have seen three-year government bonds trading at 1.44%. So, rational investors must assume that the average of overnight rates for the next three years is going to be below 1.44% to make that attractive. That’s what the market is telling me.

Simon

And what about fixed vs floating at the moment – where do you see that playing out?

Ian

Look, certainly yield to maturity is low. We can still produce, with an AGL 2021 maturity XTB 2.5%. And look, there is value in that.

If the RBA does not go, and you hold that to maturity you will still get that 2.5% and you’ve still got that liquidity option. You’ve still got the daily mark to market benefit. And you’ve got the ability to sell small parcels if you want to get out.

At the same time, if you buy floating, we can probably generate – we like to refer to Traded Margin above BBSW – BBSW is 1.70. If you say you get a traded margin of 50 – you can get maybe 210 to 220 on a monthly style product.

Simon

That’s assuming you hold to maturity.

Ian

You’re holding it, but if rates go down then that will fall and you wouldn’t have locked those in. So that maybe attractive for some people. And if rates go up they can liquidate that without the exposure to interest rates.

Simon

The other portfolios haven’t done quite as well as the Concentrated High Yield.

Ian

Well, I would say the average or the total return is not as high. But, for what they’re designed to do – they actually do that very well.

The Maturity Ladder Portfolio, for instance, has done over 3.8%. That has no longer XTB than five years. And you get principal of one XTB each year being paid back,   which is, I think a fantastic product for people looking for cash flow and to control interest rate exposure.

Simon

Ok, thanks very much.

Disclaimer
The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs. Past performance is not a guarantee of future performance.
Any opinions expressed are personal views only and do not constitute personal financial product advice.

Events

  • 23Apr 2019

    YTMSCG: Scentre 5.00% 23 OCT 2019

    This is the coupon date

  • 23Apr 2019

    YTMF06: Suncorp BBSW + 1.10% 23 APR 2019

    This is the coupon date

View Calendar
View Insights

Top insights stories

Corporate bonds and the pursuit

Read Article
Insights

Bonds vs bond funds

Read Article
Insights

Australian banks made to sweat

Read Article
Insights

CommSec Executive Series Interview

Watch now
Insights