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The projected cash flows (2 year forward) is the forecasted income investors would receive from investing $500k in the Investment Grade Model Portfolio.

Cash flows are calculated based on next call for principal cash flow.

Cash flows for fixed rate bonds are set. Cash flows for floating rate bonds assume a future rate of underlying index BBSW3M for all coupon refixes.

In what could be considered a tumultuous month for global markets, particularly the banking sector, domestic markets followed a typical risk-off sentiment. The ASX 200 fell 1.11%, and the Australian dollar weakened by 0.65% against the Greenback. Yields rallied in a steepening move, resulting in the 3-year/10-year Government bond spread widening to 36 basis points. Credit spreads widened over the month amongst banking sector issues.

Despite raising the cash rate, a further 25 basis points for a tenth consecutive month, the RBA meeting minutes portray a dovish tone, further accelerating the lower yields; it’s becoming clear any indications of a softening economy will result in a pause to reassess the outlook. Whilst unemployment numbers indicated the local job market remains robust, consumer price data extinguished hawks late in the month. Against expectations of a monthly CPI annual increase of 7.2%, actual February figures were weaker at 6.8%, down from 7.4% for the month prior. Furthermore, February retail sales grew by 0.2%, following an increase of 1.8% in January, indicating that consumers are beginning to tighten discretionary spending as higher cost of living pressures accelerate. By month end, the consensus suggests a likely rate pause at the April board meeting.

In the United States, the unexpected collapse of two regional banks within three days sent stocks into a freefall as customers rushed to draw down accounts. Regulators were quick to assure depositors of the resilience of the banking sector and the security of customer funds. Gold prices accelerated by 7.79% for the month, and the 10-year Treasury yield fell from 3.92% to 3.46%. US CPI data was released in line with expectations, and despite the ramifications of sustained higher rates, Fed officials increased the fund’s rate to 5.00%.

In Europe, UBS Group agreed to purchase rival Credit Suisse after a loss of confidence which threatened to spread across global markets. The transaction was brokered on short notice by the Swiss Government, which included a 60% discounted purchase price and a 100billion-Franc liquidity facility to withstand potential losses due to winding up Credit Suisse’s operations. Most controversially, over 16billion-Francs worth of Additional Tier 1 securities were contractually written off. In an attempt to restore the market’s sentiment toward AT1 securities, the UK and European banking regulators reiterated that under normal market conditions, these securities should only bear losses after equity has been fully absorbed.

Credit spreads were weaker over March, especially across bank CoCo’s given the US regional banking crisis and collapse of Credit Suisse. Australian credit spreads outperformed their offshore counterparts but were also impacted. Subordinated Tier 2 spreads were around 10bps wider with non-financial corporate spreads mainly unchanged over the month. We remain constructive in the 3-to-5-year part of the credit curve, which is where we see the best relative value.

We saw a flight to safety with government bond yields rallying across the curve. Locally, 3yr yields rallied 57bps and 10yr yields rallied 49bps over the month. The portfolio’s interest rate exposure helped over the month. We see the risk of a central bank policy mistake as becoming a bigger issue over the course of this year. Thus, we expect to remain nimble over 2023 and adjust our interest rate positioning as such.