By: Jarrod Deakin
The Switzer Higher Yield Fund (Managed Fund) (“SHYF”) gained 0.71% in July, outperforming its RBA Overnight Cash Rate +2.0% benchmark by 0.46%. Over 1-year, the total return of the fund is now 4.86% relative to the benchmark at 3.49%.
Last month’s report highlighted falls in global benchmark bond yields on the back of chatter from central bank governors. This “chatter” in June turned into action in July beginning with the RBA slicing 25 basis points (“bps”) from the overnight cash rate and ending with the US Federal Reserve cutting the Fed Funds target rate for the first time in a decade to 2.00% – 2.25%. Throw into the mix the Bank of Korea delivering its first rate cut in 3-years, the Bank of Japan trimming GDP and inflation expectations, the ECB moving to an explicit “easing bias” and Boris Johnson getting the job of extracting the UK from the EU and you can easily become quite gloomy.
Australian fixed income market participants remain gloomy after not being satisfied with the RBA’s two rate cuts in successive months. Overnight Index Swap pricing continues to fall as do the key funding markets including bank bill swap rates (“BBSW”). Participants are now pricing another 50 bps of cuts by mid-2020. To date, the domestic data points are not providing much encouragement to the contrary.
July was another strong month for bonds and credit across the board. CBA’s Composite Fixed Income Index, a broad based index, delivered a return of 1.03% with government, semi-government and corporate bond sub-sectors all delivering similar returns. Lower benchmark rates across all tenures (duration impact) was the primary driver of strong returns. Credit was also supported by a tightening in credit spreads, suggesting investor demand remains strong. The appetite for risk continues unabated as evidenced by the strong performance of the BBB- rated bonds, the lowest investment grade rating, relative to higher rated peers.
With regulatory changes from APRA effectively delivering the need for the major domestic banks to issue $50b of tier 2 capital by the end of 2023 – there was plenty of primary issuance from the banks in July. Demand remains strong and pricing tight.
During the month, the portfolio had two maturities (Tatts Group and Members Equity Bank). Proceeds from the maturities were used to participate in new Suncorp fixed rate issue maturing in 2024 and purchase Qantas fixed rate bonds maturing in 2026. The portfolio duration (risk) has increased marginally over the last 4-months in order to try and preserve the portfolio running yield which was 3.77% at 31 July 2019.