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Apple PodcastsJenna Labib and Matthew Macreadie join Candice and Felicity to chat about this massive and unfairly labelled ‘boring’ asset class. They discuss what bonds offer value right now, how hybrids fit in the structure, and why Australian investors have gravitated more towards properties and equities in recent times.
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Felicity Thomas and Candice Bourke are Senior Advisers at Shaw and Partners, and you can find out more here.
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Candice: [00:00:10] Hello and welcome to Talk Money To Me. Thanks so much for tuning in. I'm Candice Bourke.
Felicity: [00:00:16] And I'm Felicity Thomas. Wow. Candice, can you believe it's less than eight weeks till Christmas now?
Candice: [00:00:22] I know it's just going so fast this year before the year flies away. Let's jump into today's episode. So we have two special guests joining us today. We had the pleasure of sitting down with some of the experts in the Australian bond market from the income asset management team. So the share market and equities, they get a lot of limelight, right? They are always in the press, always in the headlines. But investors aren't aware that the bond market is actually larger than the global share market and it's estimated to be worth 119 trillion. And it plays a very important role as we're going to hear in every investor's portfolio.
Felicity: [00:00:59] 119 trillion. Well, that's a lot of bonds. So to give you a bit more context, income asset management delivers a complete income investment service. So essentially they aim to provide investors and portfolio managers with the most trustworthy and capable platform to research, execute and manage their investment. Their businesses span across deposits, bond sales and asset management, and they're all there to enable investors to compare, choose and execute in the most efficient, transparent and cost effective way. We like that.
Candice: [00:01:31] Yeah, we do. Tick, tick, tick. So we're joined today by Matthew Macreadie, who's the executive director, credit strategy and portfolio manager. Matthew's current responsibilities include providing credit commentary, views on the bond market. So he's really the expert in the room when it comes to certain things like Pacific credit issuers with the aim of helping investors to make better risk adjusted return decisions. He's also part of the team of four within the Debt Capital Markets Team or DCM team, which provides corporates, financials, property and infrastructure companies with flexible funding solutions. Before joining the team at Income Asset Management, Matthew spent eight years working at another firm as the senior credit portfolio manager at Aberdeen. So he really has a wealth of knowledge when it comes to the bond market. Matthew has executed one, three and five year credit strategies that have been consistently above the benchmark. That is super impressive, well done.
Felicity: [00:02:33] That's really impressive. Now we're also chatting with the lovely Jenna Labib, executive director of Capital Markets. Now Jenna is the head of Advisor Services at IAM Capital Markets. She's got extensive experience and knowledge of the financial markets in Australia, having spent time in a number of institutions. Now she actually joined the team after working at UBS, FIG and Deutsche Bank across equities, credit and Effects. That's quite a lot of experience, diversified experience as well. Now at UBS, Jenna worked on the equities desk in Sydney, which actually ranked number one as the top Australian cash equities sales desk at the time. So go Jenna. Now at Deutscher, Jenna worked in foreign exchange sales which gave her experience on trading floors in London, New York, Singapore and Hong Kong. So she's an international woman. Jenna currently sits on the Finance Subcommittee of the Good Sams Foundation as well, which is also important.
Candice: [00:03:28] Alrighty, so that is who we're going to be chatting to. Clearly we've set it up. These guys are the bond experts. So as always, remember today our chat is not considered personal financial advice, even though we have registered advisors at Shriram Partners. As always, guys, you know, the drill, the podcast and the content we discuss should not be considered personal advice because we don't know your goals and objectives. But hey, we could do it if you reach out, that's it.
Felicity: [00:03:54] And we've actually had a lot of listeners reach out, so keep them coming because I'm more than happy to help. Now, in last week's episode, we gave our listeners some background on all things venture capital, which is also very different from the bond market. So bonds aren't boring. Let's kick this off. Welcome, Jenna and Matt to Talk Money To Me.
Jenna: [00:04:13] Thank you. We're so excited to be here. Good.
Matt: [00:04:15] Yeah, it's great to be here today.
Candice: [00:04:17] Awesome. So we want to just start off by setting the scene. So, Jenna, can you give us the rundown? What exactly is a bond?
Jenna: [00:04:25] Yes. So a bond is essentially a loan. When you purchase a bond, you will lending money to an entity, often a government or a corporate. So the investor is laying out the initial outlay and then over the life of the bond, they'll receive back interest along the way and at maturity they'll receive their principal back those interest payments that you receive along the way, a called coupon payments. Now investors, particularly in Australia, understand shares very well. You need to have a slightly different mindset when you're investing in bonds if you purchase a share. You'll become a part owner in that company. Your interest is in seeing the capital value of those shares increase and in receiving a dividend along the way. When you buy a bond, however, it's a contractual obligation of the issue of the bond to pay your coupons along the way and your principal at maturity. This means that investing in a company's bond is a lower risk than owning its equity or its shares.
Felicity: [00:05:25] Right. That's really good to know. And I guess, Jenna, how big is the bond market?
Jenna: [00:05:29] Interesting that the global bond market is actually bigger than the global share market in terms of bonds outstanding. That's interesting because the bond market in Australia doesn't really get talked about as much. You know, equities and property seem to get more of the time 100%.
Felicity: [00:05:46] And I guess how income asset management kind of fit into all of this.
Jenna: [00:05:50] Over the past two and a bit years? I am or income asset management has really grown from a deposit only broking house into a full service investment house focused on income investments. Our capital markets business, which is the part that Matt and I fit into, provides direct access to corporate bonds for wholesale investors. We service a range of clients, including wealth advisors, private clients, stockbrokers, family offices as well as not for profits.
Felicity: [00:06:20] So Matt, just following up from what Jenna is saying there, you know, she is right. The equity in the share market gets a lot more press, but that's slowly changing right at the moment. The bond and the credit market is getting more air time. So why is that? And do you think that bonds are offering good value right now for investors yet?
Matt: [00:06:40] It's an interesting time to be in bonds, that's for sure. So over the last decade, what's happened is these bond yields have been kind of artificially kept low as central banks have pumped a lot of liquidity into the system. So this is saying bond yields come down and down and down to a level where investors weren't really getting any return on their bonds. So when you look at the return after, say, inflation, a lot of bonds were offering a negative return. Now, what's happened is we've cut to a period now where inflation has kind of poked its head out of the cupboard. And that has meant that central banks around the world are starting to raise interest rates as they raise interest rates. What that means is that bond yields have gone up. And so that means that bond yields are now offering a more attractive entry point for both new investors, but also existing investors. What we know about bonds is they're typically a low risk asset class. So by low risk, I mean they have a low correlation to equity markets. So when equity markets sell off, bonds tend to do well when equity markets rise. What tends to happen is bonds don't do as well as equities, but they still offer a good return. So it's really kind of come back into a point where bonds should be part of every investor's portfolio and they also offer a return, which is now after inflation, a positive rate of return.
Felicity: [00:08:20] Yeah, that's a really good explanation because I guess Matt is taking a step back, that's the current market. But when inflation is under control, you know, two, 3%, which is kind of what nearly every economy wants to target, what is a typical bond return in that environment?
Matt: [00:08:37] Yeah, so typically upon bond returning at 2 to 3%, inflation would be about 5 to 6% for an investment grade rated corporate. And that's kind of where we we see it heading at the moment. A lot of investment grade Triple Bay corporates are offering 6 to 7%, but that's at the moment because inflation is a lot higher than than we expect in the long run. So as inflation normalises to that 2 to 3% level, then yes, we think 5 to 6% would be your average return for investment grade pay corporate.
Felicity: [00:09:15] Okay, that's good to hear. I guess what is interesting and I love your comments on this is the bond market was seen as very defensive, right. That's where investors should go as their defensive asset allocation to their portfolio versus equities, which is growth. However, we saw that the bond market was off about 16% this year. Do you have any comments on that and know why wasn't that a safe haven for investors?
Matt: [00:09:41] That's a good, good point to raise there. So when we when people see in the headlines the bond market was off 16%, that's really referring to those bonds which are fixed rate and have duration. So that's what's kind of caused that negative performance over the year. Now the bond market. Is not just fixed rate bonds. So the bond market comprises fixed rate bonds, floating rate bonds, inflation linked bonds. So investors should not just focus on, I guess, the fixed rate component of their bond portfolio. Floating rate bonds, which have no duration, actually did quite well over the years. So they had a small positive return over the year versus that -16% that you quoted in your earlier remarks. So I think investors need to distinguish between what's fixed rate and floating rate. And I think what we tell our clients at an I am level is you need to have diversification across those three buckets that I mentioned, fixed loading and inflation linked to kind of optimise your portfolio in the current kind of volatile environment.
Felicity: [00:10:49] Definitely, because it seems like a lot of the major bond managers didn't actually get that right, which we've seen. So could you just quickly explain duration just for our audience?
Matt: [00:11:00] Sure. And yes, duration has been typically very hard for a lot of bond managers to manage. Duration is really simplistically how sensitive your portfolio is to changes in interest rates. So duration is really a fixed rate bond dynamic, not a floating rate bond dynamic because floating rate bonds don't have duration. Fixed rate bonds do have duration. So if, for instance, your interest rates in the market went up by 1%, we know that interest rates and bond prices are inversely correlated. So if interest rates went up 1%, then bond prices will go down 1% and duration is an approximation term. So 1% up in interest rates, 1% down in prices on the bond portfolio. So this year, we've seen interest rates rise by 5%, for instance. So assuming you've got a portfolio where interest rates have risen 5%, your bond prices are going to fall by 5%. And this is on a one year duration portfolio, it's always a five year duration portfolio. Then you would see that impact exacerbated.
Felicity: [00:12:22] Outlook that's going to happen. So Jenna, I guess why have Australian investors gravitate more towards property in equities, you think, than bonds?
Jenna: [00:12:33] It's a great question. We see it all the time that Australian investors typically have had term deposits on one side property and shares on the other side, nothing really sitting in between and that's for a number of reasons I'd say primarily access and also tax. So you know, firstly with access, the bond market is an over-the-counter market. So what that means is transactions are private agreements between a buyer and a seller, the prices, the market depth, the volume of orders, they're not put up on a wall like they are on the ASX for everyone to see. That's why you need a broker like I am in order to buy bonds. Secondly, in Australia, our favourable tax treatment of property investment, equity dividends and hybrid securities has really influenced investment decisions. However, it is really important for Australian investors to have a balanced portfolio that includes an allocation to fixed income. You know, particularly as investors get older, portfolios do need to be more defensive as investors don't necessarily have, you know, the same certainty of next month's paycheque or next year's bonus in order to potentially recoup any losses that they might incur from their investments.
Felicity: [00:13:48] Okay. So just a follow up question here, Jenna, is there I guess, less liquidity in the bond market? Is that you think maybe one of the reasons that investors aren't going towards bonds or is it probably a really good time to get into bonds now?
Jenna: [00:14:04] I wouldn't say there's less liquidity. I mean, if I look at, you know, any of the big government bonds, which are really the most liquid kind of security, you could trade $50 million of government bonds much easier than you could, you know, transact in an equity. And that's that kind of size. A big function of liquidity is often the issuance size. So, for example, CBA came to the market last week with a dual tranche two, which comprised of a fixed and a floating rate line, and that issuance was about $2 billion. So in that instance, you know, you'd be able to get almost daily liquidity in good market conditions. The other thing to remember with bonds is liquidity risk. That's a little bit mitigated by the fact that you always have a natural liquidity event when a bond matures. So unlike, you know, shares and even hybrids that might be more perpetual in nature with bonds more generally, they have a maturity date when you're going to get your funds back.
Candice: [00:14:58] Yeah, that's right. Because. The contracts are up. So you touched on hybrids, General. Let's just keep going with that. Sector or asset class, I should say, because it's really important, I think, to breakdown the difference between a bond and a hybrid. So can you run us through that and exactly where they sit in the cap structure?
Jenna: [00:15:17] Great question. So the clue is very much in the name. As the name suggests, hybrids combine both debt and equity characteristics. So t one hybrid securities, they form part of a bank's regulatory capital. They're an equity buffer to protect depositors from losses. And they rank above equity in the capital stack. In times of crisis, those coupon payments could be halted in extreme cases. Hybrids could be converted into ordinary shares. And hybrids also have significant coal risk relative to corporate bonds due to the perpetual nature of many hybrids. Whereas, as I mentioned, corporate bonds will generally have a hard bullet maturity. So while, you know, we do think allocating a small portion to hybrids can be effective, particularly in today's environment, we're finding a lot of investors are looking for downside protection during market turbulence. They do want to sit higher up in the capital stack, you know, so be in subordinated debt or senior unsecured, which sit above hybrids. The other thing that I'd quickly highlight is that the hybrid market is a really tiny segment of the Australian corporate bond market. It sits at around 5% of Australian corporate bonds outstanding. So look, I don't think there's any doubt that hybrids have a place in portfolios, but also alongside corporate bonds.
Candice: [00:16:41] So basically it's good to have a combination of bonds, hybrid equities, listed property and direct property in your portfolio to be truly diversified. So mad when markets signal that inflation has peaked and rates normalise hopefully soon. Do you think investors in the bond market should go more towards fixed floating or inflation linked? I mean, what should continue to hold a mix of all three? What are you thinking? I guess. Is there a trade in this?
Matt: [00:17:14] Yes. So this is always a challenge for investors. And so we would think a combination of fixed and floating is probably the best option here. Very simplistically, anyone who thinks the market is pricing rates too high should go fixed and grab the higher rate on offer now. Conversely, anyone who thinks the market is correct or rates will go higher from here should go floating. So it's really what your view is on is inflation under control and our interest rates, you know, acceptable now. And then you can make the decision on fixed and floating. But I guess coming back to your question earlier on, a lot of duration managers have got that call wrong over the years. So it's not always easy to predict where interest rates are going to go. And I think for these reasons, it's it's better to have a balance of both fixed and floating, as well as some inflation linked bonds, just to make sure you're appropriately hedged for a number of different interest rate scenario outcomes.
Candice: [00:18:27] That hedge your bets because realistically, no one has a crystal ball. I wish we did. This would be very, very helpful for us and managing our clients well. Now in a moment, we're going to dive deeper into the world of bonds, explain what a credit spread actually is. But first, let's hear from our sponsors. And we're back. All right, Matt, let's get into the nitty gritty details of buying bonds. So if I want to buy a bond and I'm going to place a trades for you guys, what sort of spreads are available on the different credit ratings? And I've got a second follow up as well. Question to that, Matt.
Matt: [00:19:05] A credit spreads is generally kind of the compensation investors require to the credit risk on that bond. So credit risk is normally measured by what we call these independent rating houses, S&P, Moody's and Fitch. And so credit ratings tend to go from triple-A, which is the very low risk, high credit quality items to triple C, which is the very high risk low credit quality items. So that's the scale. And generally the credit spread gets higher and higher as you go down that spectrum. So for example, a triple-A credit spread might be 50 bips, 4.5% down to a triple C bond, which could be a thousand bips or 10%. So there's a big range of, I guess, credit spread quantitative threshold from the top to the bottom. And in the bond market, we do see a lot of divergence across that spectrum. So when we talk about credit spread, the credit spread gets added to the underlying base right to date factor in what's called the bond yield. So the bond yield comprises a credit spread. And the credit spread is how investors determine which bonds are better than others on a risk return basis. So that's just more about the mechanics involved. Now focusing on the investment grade spectrum, which is triple B-minus, all the way up to triple-A for a five year average maturity, you're generally looking at a credit spread of 300 bips or 3%, so that security all the way up to 50 bips or 0.5% on triple-A in the high yield market, which is double B plus all the way down to triple C, you're looking at a credit spread for a five year average maturity of around 400 bips or 4%, all the way down to, you know, around the 10% to 12% mark to triple C or what we call a thousand bips to 1200 bips.
Candice: [00:21:19] And they're also commonly known as. Correct me if I'm wrong, junk bonds, right?
Matt: [00:21:24] Yeah. So junk bonds do get a kind of a bad name, I guess, in the US. But in the high yield market, which starts from double B-plus down to triple C, junk bonds are really triple C and below. So everything not triple C would not be classified as a junk bond. So it's really, I guess, at the pointy end of that high yield spectrum.
Candice: [00:21:48] Okay. And here comes my follow up. So can an investment grade bond fall into non-investment grade and vice versa? What are the trigger points for the grade credit rating to change?
Matt: [00:22:03] Yeah, that's a really good, good question. And it does happen a lot. And they're called fallen angels in this market. So an angel because they were investment grade and they become fallen angels the day they come back. Yes, exactly. So the trick is there are things like I'll give you an example with a company, Qantas, for instance, Qantas was going under pressure during COVID. Airline passenger activity was weaker. And so cash flow would be weaker because you got less people travelling on planes and therefore debt metrics because the company had a lot of leverage. And so that could be one trigger that pushes a company that's already at, say, a triple B-minus level down to double B-plus. And rating agencies tend to look at things like industry factors, business factors, overall leverage limits, what the governance structures are, how the management teams operating. Does the company have good access to the equity markets and can they fund themselves well? So there's a number of triggers that can cause that company to be downgraded. But generally, those companies that have quite a good long term business profile are able to get through those tough times and then come out of that better. And so those companies can tend to come back up to investment grade, whereas you can see other companies who start the downward slide and go further into the high yield spectrum. And these tend to be the ones that really don't have a good business model. They don't have a product which is selling well. The industry is under threat from structured. Or serious competition. And so they just get weaker and weaker and eventually can lead to a default. But generally, those better companies can reverse the process and move back up the rating scale.
Candice: [00:24:03] Becoming a rising angel. So everyone look out for rising angels. Now, Jenna, look, the Australian bond market is a lot smaller than the global bond market, right? Am I correct in saying that? Can investors actually buy bonds issued in other currencies?
Jenna: [00:24:23] Yes, you're exactly right. The Australian bond market, particularly the Australian high yield bond market, is quite undeveloped compared to the rest of the world. You know, the US bond market, that's the, you know, largest and most liquid securities market in the world. So wholesale investors can invest in foreign currency denominated bonds. They offer access to bonds in USD sterling and euro. And this offers investors the ability to diversify their portfolio allocations through a greater number of issuers and opportunities and choice. It's good for clients who want exposure to foreign currencies, or it's good for clients who might already be holding funds in these currencies and wanting to put it to work. Now this does introduce risk into portfolios and can result in gains and losses. For example, investors that were purchasing bonds at the beginning of the year when Aussie dollar was around $0.72, might have decided to sell their USD bonds when the Aussie dollar felt the low sixties and to bring the proceeds back into Aussie. However, the currency can also move against you. One thing to highlight is that, you know, investors looking for foreign currency exposure but not wanting to, you know, have to get comfortable with a lot of new companies might find comfort in recognising Australian companies who issue in other currencies. So for example, you know, the likes of Fortescue, BHP, Westpac, Newcastle Coal, they're very well-known local names who regularly issue USD denominated bonds.
Candice: [00:25:58] Yeah, that's really interesting. And look, we've got some clients that already have USD and actually want to generate some U.S. income. So the US bonds have been really good for that. Can I ask a question? Why do these large names like Mine Resources Newcastle Coal Issue in USD?
Jenna: [00:26:16] Matt Leave that one to Matt.
Felicity: [00:26:17] They get revenue in USD, that's why.
Matt: [00:26:19] Yeah. And yeah, you're correct. Their revenues are based in USD so they can match their interest costs, which would also be USD. So it provides a natural hedge for them.
Felicity: [00:26:30] So Matt, coming back to the credit ratings, let's go into politics, if there is any there. You know, why do some bonds have independent rating agencies and others don't?
Matt: [00:26:43] Yes. And this is a question which I guess not a lot of investors really question. A lot of the time, it's very expensive for a company to maintain credit rating. So there's a cost of administration, there's a cost of monitoring, and there's a cost of disclosing this to the market. So the larger corporates who tend to issue bonds a lot in big sizes and have different curves in different currencies, tend to have three credit ratings by Moody's, S&P and Fitch. The smaller corporates who don't issue bonds as frequently they don't have kind of curves across different currencies tend to try an issue in an unrated capacity. The other consideration is institutional investors, as opposed to the kind of wholesale or retail investors that require a credit rating in terms of their mandate limitation, whereas wholesale and retail investors might be less constrained by having a credit rating on bonds they bought. And so the institutional market is bigger than the wholesale and retail market. And so that can sometimes drive why corporates have a credit rating or not. However, in the last decade, we've seen this rise in what we call kind of private credit into the market, and the private credit funds really buy bonds in an unrated capacity. And so that's driven a lot of demand for unrated issuances. Now, I have led a couple of these unrated issuance as well as a lot of other competitors in the market. And this is a space we see kind of growing in the future, especially as unrated bonds have a lower correlation to some of those publicly rated bonds in the market and also offer diversification and also different liquidity aspects.
Candice: [00:28:35] How interesting. So I guess here then, Matt, how should someone assess whether they should switch from one bond to another? I mean, does that. It's obviously traded, right? Or is it better to hold to maturity? You know, what are your comments and thoughts there?
Matt: [00:28:52] Yeah. And so Jenna will deal with this as well with her client base. And we get this question a lot in terms of, well, when's the right time to switch from a bond? Should I do it now? Should I wait till maturity? The first thing I would comment on is it really depends on, I guess, the investor's risk horizon, but also what the investor's requirements are around drawdown and cash flows. They might have a big expense coming up. They might have a holiday, they might have a medical operation they need to facilitate. So they might need cash in the door now. But generally, an investor should assess the credit risk of the bond, which I talked about through the credit spread and credit writing, how much interest rate risk they have in their portfolio or duration, and then what's the yield that they're currently earning on their portfolio? So if, for instance, I'll give you an example, an investor is looking at two triple B bonds. Both of them have five years average maturity, but one is offering a 6% yield and the other is offering a 5% yield. Then it probably would makes sense for them to switch to that bond, offering the 6% yield over the 5% yield because the credit rating and the interest rate risk are both the same. And so that's one example of a switch that would make sense for an investor.
Candice: [00:30:15] Okay, that makes sense. I guess here a lot of the bonds that we've seen are trading below their face value. Right. So if someone was to invest in one of the bonds, it's actually trading below, below face value and hold it to maturity. Do they get essentially capital upside?
Matt: [00:30:33] Yeah, they do. So that capital upside will be factored in what we referred to as the yield to maturity. So the yield to maturity will factor in that you're buying this bond at a discount. You will earn a number of coupons on that bond by holding it to maturity. But you're also on the capital gain on that bond being paid out at 100 and you are buying the bond at that purchase price of well below par currently. So that yield to maturity has jumped up significantly over the last year. And that's what's really kind of when we go back to that first question, why bonds are looking so attractive at this point in time, why now is a very good entry point for investors. So those discounted bonds, we would advise investors, especially those who are looking at the bond market now, it's a very good entry point to to really get a lot of capital upside.
Felicity: [00:31:30] Okay. So reading between the lines, obviously buy low, sell high, enjoy the contract and the coupons along the way. And what Matt is essentially saying is that there's a lot of value at the moment that he's seeing in the bond markets. So if you don't have any bond exposure in your portfolio, take a listen to what they're saying. These are the experts. I just want to pivot to one section that we haven't spoken about in the bond market. Real quickly, guys, with you, is the rise of ESG bonds, do they get as big of a credit spread that we've spoken about, you know, and are they raided? Are they on the increase? Green bonds, right. That's the little name for them. Yeah. What's going on in the ESG space of the bond market?
Jenna: [00:32:18] Yeah, we are getting a lot of interest from clients at the moment, you know, that are wanting to have their investments that are aligned with, you know, their ethical principles. And so looking at these kinds of bonds and they're very interesting green bonds because they can work in a few different ways. They can almost be a bit of carrot or stick some of the time. So some of the sustainability linked bonds will have certain targets that issuers need to meet, and if issuers don't meet them, then they might be a stick, i.e., you know, the coupon might step up or things like that. And so they're actually very interesting instruments. One thing I'd highlight is that a lot of the time these tend to be fixed coupon bonds, so you can't really get as much floating rate exposure to ESG bonds.
Candice: [00:33:04] That is really interesting and a lot of the US one seem to be fixed as well, which is quite interesting. So this is a good segue to our final question. You know, what are some of your top picks at the moment, Jenna, in the bond market? Is there any green bonds you really like or any new issues? We'd love to hear them because we love investable ideas on Talk of Money to Me.
Jenna: [00:33:25] Oh, perfect. We love them too. So we mentioned the Tier two securities that we really see a lot of value at the moment, you know, in the Australian debt capital structure, given that we are seeing a team huge shift towards quality in portfolios. The 82 that CBA issued last week had a fixed trend. And a floating rate tranche. The fixed was at 6.86% and the floating rate was a quarterly coupon of three months swap plus 3.7%. And this bond is callable in five years time. Outside of the financials, we always see a lot of interest in the infrastructure sector, given, you know, the criticality of the assets as well as limited competition. So from a credit perspective, we really like AusNet. It's very robust as a business. It's in an industry with very stable cash flows, high barriers to entry and they have a floating rate investment grade exposure in the form of they hybrid.
Candice: [00:34:25] That's really interesting. So, you know, the CBA bond was meant to be around seven, right? So they've made it a little bit lower. Do you think that is because they don't actually believe that rates will increase as much as predicted or what was the reason that it was a bit lower?
Jenna: [00:34:40] So when investors come to market, they take indications of interest from the market and they'll usually put out a range that it's likely to price between. And then, you know, during the process, if they get flooded with demand, as happened in the instance of CBA, then they can bring that pricing in.
Felicity: [00:34:57] So supply and demand. Got it.
Matt: [00:34:59] Exactly. And I think just adding to that point of, Jenna, that the bond yield on that CBA security was very good against, say, the dividend yield on a CBA equity. And so investors are looking at the bond market and the equity market and going, hey, CBA, I can get a better return in the bond market than I can in the equity market. So that was, again, another reason why, I guess on from a demand side, it was so strong.
Felicity: [00:35:28] Yeah. And to add to that, because as we saw in COVID, I don't think CBA was in this category, but equities can turn off their dividends or reduce their dividends. Right. Whereas like we've heard from Jenna and Matt at the top of this chart, it's a contract at the end of the day, so they have to pay these coupons. So that was super interesting. And one fun way to end the interview episodes that we do here at Talk to Me is to ask you the very big question. We're going to hear both of your answers. Are you ready? Coffee, tea or tequila?
Jenna: [00:36:02] Tea-quila
Candice: [00:36:04] So you start with a tea and then end with a tequila.
Jenna: [00:36:06] Exactly. Business first party.
Candice: [00:36:08] Second. Love it. So good. And Matt?
Matt: [00:36:11] Yeah, I just got back from a holiday, so I definitely would say I would continue the tequila and keep that going. And especially with markets the way they are, I think tequila would go down quite well.
Candice: [00:36:25] Go down a treat. Awesome. Well, thank you so much for joining us today in Talk Money To Me, that was such an interesting episode and we can't wait for everyone to hear it.
Jenna: [00:36:35] Thank you so much for having us.
Matt: [00:36:36] Thanks very much, guys.
Candice: [00:36:38] Alrighty, so that is a wrap. We hope you enjoyed our chat today with Jenna and Matt from the I Am desk. Now if that was sparking your interest and you're thinking maybe I should have a conversation about adding some bonds into my portfolio, they're happy for you guys to reach out via email and we have included their emails in the show notes below. Now, before we sign off, please remember, although Felicity and I are financial advisors at Shaw and Partners, as always today our discussion does not constitute as personal financial advice. You should always go out and seek professional advice and do your own research before you make your investment decisions. Today's episode was based on the facts known at the time, which is recording on the 1st of November. Happy Melbourne Cup day. If you're listening in Australia, that's it and make sure you follow us on at Talk Money to Me podcast for daily market updates. It's not at Talk Money to my podcast. Now if you enjoyed it, please make sure you give us five stars on Apple Podcast and Spotify. And remember, if you have any questions or you want to ask us anything, email us at tmtm@equitymates.com or check us out at CFAgroup.com today. You will be back next week. Until next time. See you later.
