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SET, FORGET AND REALLY ENJOY LIFE WITH 5.58%pa^

ON INVESTMENT GRADE BONDS

The Fixed Rate Tier 2 Model Portfolio

5.58% + PA^

Yield to Maturity
(calculated based on Ask pricing with 75c of brokerage applied)

This Fixed Rate Tier 2 Model portfolio has 10 AUD-denominated securities with equal weightings of 10% (in face value terms). It assumes an investment of A$5 million face value. If investors would like access to the underlying securities, then please talk to an IAM Sales Representative.

The portfolio will invest in a range of liquid, investment-grade fixed tier 2 bonds from banks and insurers.

Coupon Type

FIXED

FLOATING

Bond Maturity

< 3 YEARS

3 - 5 YEARS

5+ YEARS

Sector

FINANCIAL

OTHER

Market Update

Incoming economic data over January further reinforced peak cash rate sentiment; inflation continues to show signs of moderation and retail sales were subdued for the month of December. Both equity and credit markets performed well, continuing the rally which began in November 2023.
Australian government bond yields remain elevated, with 10-year rates rangebound between 3.95% and 4.01% over the course of January. The Australian dollar came under pressure due to a combination of a less dovish tone from the Federal Reserve and weakening conditions out of the Chinese property sector.
In the US, there’d been murmurs of as many as five rate cuts throughout 2024. However, forecasts are now suggesting a slower pace of easing, and so throughout the latter part of January, yields bucked their downward trend, with markets eagerly awaiting a clear direction on what comes next.

Portfolio Update – January 2024

Projected Cash Flows

The projected cash flows (2 year forward) is the forecasted income
investors would receive from investing A$5 million face value in the Wholesale Investment Grade Model Portfolio.

Cash flows are calculated based on next call for principal cash flow figures with the following applying:

  • Cash flows for fixed rate bonds are set out and paid in accordance with the disclosure documents for the bonds.
Interest Rate Duration (Years) 5.10
Average Life (Years) 6.39
Credit Duration (Years) 4.95
Yield to Maturity** 5.58%
Average Rating* BBB+

*Average Rating is based on a linear basis
**Yield to maturity is calculated based on Ask pricing with 75c of brokerage applied

Performance

1M

Since Inception

ASX200 Index (AS51 Index)

1.18%

5.14%

AusBond Composite Index (BACM0 Index)

0.21%

2.41%

AusBond Credit Index (BACR0 Index)

0.41%

3.01%

Wholesale Investment Grade Portfolio

0.34%

5.71%

*Note inception of the Fixed Rate Tier 2 model portfolio was 1 September 2023.
** Performance is calculated using Total Returns over each time period based on Bid pricing of underlying assets.

Portfolio Commentary

Over the month of January 2024, Australian equities outperformed the bond market by posting 1.18% of returns versus 0.21% on the back of positive sentiments. Notwithstanding the persistent macroeconomic uncertainty considering sticky inflation and elevated interest rates. In this regard, the bond market proves to be a safer haven whilst boosting comparable, attractive yields.
The model portfolio returned 0.34% over the month, benefitting the most from holding NAB 6.322 08/03/32 issue as it appreciated in price. There were no relative value switches this month as the existing positions are deemed most attractive. As an example, the newly issued Tier 2 note ANZ 5.888 16/01/29 did not stack up compared to portfolio positions that pays above 6% coupon.

Assumptions

  • Interim cashflows are reinvested.
  • Intra-period capital contribution is not accounted for.
  • Total return represents sum of price returns and coupon/income returns