Our top duration trade picks would be as follows:
1. AIRNZ 5.7 05/25/2026. AIRNZ presents an opportunity in respect of their AUD notes. From an airline perspective, we have seen a recovery in average daily passenger activity in line with the relation of COVID-19 linked government restrictions. And specific to AIRNZ, it is well positioned for higher inflation and higher interest environment. AIRNZ is a strong airline with implied NZ government support, and the recovery in passenger volumes is positive.
2. AZOAU 3 03/09/2028. Aurizon, through its acquisition of One-Rail, has transitioned its business model to become less reliant on coal haulage and more on intermodal freight. Debt metrics are relatively conservative, and its cash flows are regulated under the Queensland Coal Network Framework.
3. PNHAU 5.4 05/12/2027. Pacific National is more reliant on coal haulage than Aurizon, but also runs very conservative debt metrics. Pacific National’s shareholders are all large industry superfunds, so they have considerable skin in the game and would like to run this infrastructure asset with a BBB rating.
All are investment grade and offer a yield to maturity (YTM) of 6% plus. We could look at the high-yield spectrum, but at the moment the rates on offer within the investment grade category stack up favourably versus high-yield.
Given the increase in government bond yields, it is a good opportunity to start adding duration back into portfolios – even selectively. However, it is important to get the right curve position. Consider chart 1 below, which shows the shape of the Australian government bond curve. By buying longer-dated assets, expected returns are increased − but there is of course no free lunch.
These assets come with greater interest rate risk, meaning more interest rate sensitivity. We believe a focus on the 3-5 year part of the curve makes the most sense. Investors can pick up 80-90% of the yield available while only taking 50% of the interest rate risk embedded in the government bond curve.
Chart 1. Australian Government Bond Curve
The next thing to consider is where the greatest risk-return is from a credit spread perspective.
Chart 2. Relative Value