The three month anniversary of the Senior Bond Model Portfolio provides a good opportunity to consider its performance, especially because the RBA elected to cut the cash rate by 25 basis points at its May meeting.
The overall return for the March-May quarter was 1.54%. The range of returns for individual bonds varied from 0.81% (YTMSYD) to 2.52% (YTMLLC). Nine out of 16 bonds had an ex-dividend date during the quarter, with the average total return of these bonds being higher than the overall portfolio performance, suggesting those bonds with imminent cash flows were preferentially sought out.
The effect of a cut in the cash rate was clear. In the week following the RBA’s decision, the portfolio rose in value by 70 basis points. This clearly demonstrates just how important interest rates are for fixed rate bonds.
Favourable performance against a relevant index
The Senior Bond Model Portfolio is not officially benchmarked to an index, but during the quarter it outperformed the Bloomberg AusBond Credit (0-5 years) index by 14 basis points. This index has significant exposure to banks and financials, whereas the Ord Minnett portfolio draws only from non-financial issuers. However, with very similar durations, the effect of interest rate changes was essentially the same in both cases and thus the out-performance can be attributed to security selection and the additional return required based on relative credit quality.
Interest rates to remain a tailwind in 2016
Developed world bond yields have fallen dramatically over the past 18 months, reflecting a deep pessimism about the medium-to-long term growth prospects of the global economy. Australian interest rates remain high by global standards, as do rates for senior corporate bonds. What these low yields are really saying, in our view, is that risk averse investors are becoming increasingly desperate to secure reliable cash flow. Senior unsecured, fixed rate corporate bonds are well suited to achieve this aim.
|Portfolio Key Statistics||14 June 2016|
|Prospective Gross Yield to Maturity (p.a)||2.67%|
|Prospective Gross Running Yield (p.a.)||5.41%|
|Weighted Average Time to Maturity (years)||2.82|
|Asset Swap Spread||0.78%|
Source: IRESS, Ord Minnett estimates
For further details please contact Ord Minnett:
Brad Dunn, Head of Fixed Interest Research
T: 02 8216 6735