Income Report / Income Report: What does the sell-off in bonds mean for traditional income stocks? (CSR, IGL, TLS, SKI, TCL)

By Market Matters 12 September 19

Income Report: What does the sell-off in bonds mean for traditional income stocks? (CSR, IGL, TLS, SKI, TCL)

Market Matters Income Report 12th September 2019

The market opened strongly this morning thanks to a positive session overseas plus strong buying in the US Futures market before our open, however as the day progressed, more selling emerged with the ASX 200 trading down from earlier highs by lunchtime. Energy the weakest link thanks to a sell-off in crude overnight, a topic we covered in the AM Report this morning  while we saw most buying focussed in the more defensive areas of the market, Utilities and Telco’s the main beneficiaries.

Overall, the ASX 200 is currently trading up +36pts or +0.40% to 6669. 

ASX 200 Chart

The Income Portfolio was up +1.92% on the week supported by strong moves in Whitehaven Coal (WHC) +11.28%, Genworth (GMA) +8.94% plus Perpetual (PPT) & NAB  which added +5% a piece. CBAPF, CBAPG, NABPF, PPT, WHC &  EHE traded ex-dividend. The portfolio is now up +1.92% financial year to date, versus its absolute return benchmark of +0.99%. Since inception the portfolio is up +19.03% vs the benchmark of +11.91%, which equates to 8.29% pa since inception with significantly less volatility than the underlying equity market.   

For those interested in investing for income in a low rate environment, Market Markets does run an Separately Managed Account (SMA) which is open for investment. The portfolio is based on the MM Income Portfolio below. The SMA has now passed its first anniversary and performance has remained sound.  The August update can be viewed – Click Here

1 CSR Limited (CSR) $4.09

On Wednesday last week CSR was trading down 6% at $3.72 on a broker downgrade from JP Morgan, they lowered their target price from $3.80 to $3.50 and put the stock on an equivalent sell recommendation. As at yesterday's close, the stock has recouped that decline and more closing at $4.09 as building related stocks enjoyed a strong week. The basis of the downgrade was to do with an expected slowdown in residential construction due to weakness in building approvals. For the 12 months to July 19, residential approvals have fallen by -21% versus the previous corresponding period (pcp) which should weigh on the volumes of building products sold. While we view this as a legitimate concern, the spike in the past week from the likes of CSR, Fletcher Building (FBU), Boral (BLD) and Adelaide Brighton (ABC) shows how short the market is this sector.

As we suggested in the AM report yesterday, we are open-minded at MM and while we took a disappointing hit on ABC in the Platinum Portfolio, we remained patient in the Income Portfolio with our position in CSR and we are now watching the embattled building sector closely for a potential sustained recovery.

MM is bullish CSR, targeting new highs above $4.40

CSR Chart

2 IVE Group (IGL) $2.17

We have the Executive Chairman Geoff Selig coming in today to provide more context around their results. While it’s hard to get too excited about the integrated marketing business, it seems they’ve had a decent year showing strong progress in simplifying the business through a challenging environment. The share price has trickled higher post results however they still trade on an Est P/E of just 8.8x with forecast to yield 8.1% fully franked over the next 12 months, the stock trades ex-dividend in 3 days for 7.7cps fully franked.

MM is bullish IGL, targeting $2.30+

IVE Group (IGL) Chart

What does the sell-off in bonds mean for traditional income stocks?

Over the past week we’ve seem reasonable activity across bond markets , with prices down and yields up, the US 10-year bond yield now trading at 1.73% versus a recent low of 1.44%. This has had obvious ramifications for traditional income stocks which have pulled back from highs generally set in early August. Sydney Airports(SYD) has declined around -8.5%, Transurban (TCL) is off more than -11%, Spark Infrastructure (SKI) -18% and Telstra (TLS) -11% excluding the August dividend of 8cps.

The obvious question being, should we be fading this bond market move, increasing our exposure to high quality income stocks into weakness?  

The down trend in US & global bond yields has been aggressive in 2019 as many market followers now expect a recession in the next 12-months. President Trump’s approval rating has fallen below 40% following concerns on how he’s handling the US economy, around 60% of Americans now believe a recession is very likely hence the volatile President needs to resolve US – China trade sooner rather than later to kick start his 2020 election campaign - a potentially bullish outcome for bond yields.

However, bond yields have bounced numerous times in a broader downtrend only to fall away and make new lows. This time however the move has been a more aggressive one flying in the face of Donald Trump’s calls for  rates to move lower.  

On balance MM thinks US bond yields will at least test sub 1.5% one more time.

US  10-year Bond yield Chart

Assuming this is simply a short term spike in bond yields, it suggests that quality yield stocks can be bought into weakness, although at MM, we’re certainly less optimistic on the income stocks that are most influences by bond yields (i.e. infrastructure) given the maturity of the trend in rates.

1 Telstra (TLS) $3.56 - forecast yield 4.5% ff

Telco heavyweight Telstra has enjoyed a strong 12 months trading from below $2.80 to briefly sneaking above $4 in early August. While the yield in Telstra has declined materially after they cut the dividend, this improves the sustainability of the payout while it should also improve the growth trajectory of the business.  

MM views Telstra (TLS) as an accumulate between $3.45 &  $3.60. with its 4.5% fully franked yield and lower payout ratio still attractive

Telstra (TLS) Chart

2 Spark Infrastructure (SKI) $2.16 – forecast yield 6.94% unfranked

The regulated utility and infrastructure company has had a mixed 12 months,  with tax changes having an impact on the ability for the market to forecast future dividends while lower bond yields actually have a negative impact on revenue (given the regulated nature of pricing), although lower funding costs does help the expense line.

These convoluted factors implies that SKI is not the traditional yield / bond proxy that a SYD or TCL is and for that reason may not be impacted as negatively when bond yields do eventually make a sustained recovery.    

Technically, SKI could test under $2.00 however the risk/reward is improving rapidly at current levels.

MM is becoming more bullish on SKI nearing $2

Spark Infrastructure (SKI) Chart

3 Transurban (TCL) $14.17 forecast yield of 4.44% unfranked

TCL is the classic Australian “yield play” stock and after raising capital during August, it now finds itself under pressure from the short term rally in bond yields, highlighting just how influential the cost of capital is for this impressive toll road operator.

TCL looks an accumulate between $13.50 and  $14 with stops below $12.50.

Transurban (TCL) Chart

Rising bond yields are generally a negative for traditional income stocks, although to differing degrees. Telstra for instance is now likely to be influenced less by bond yields than it was in the past. While we believe that the bear market in bond yields is now very mature, another re-test of the lows would not surprise.


We are bullish Telstra (TLS) from current levels   

We are becoming more bullish SKI nearer $2.00

TCL is an accumulate for yield below $14, although we would use stops in case we’re wrong about bond yields and they track higher from here before re-testing lows.  

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


All figures contained from sources believed to be accurate.  All prices stated are based on the last close price at the time of writing unless otherwise noted. Market Matters does not make any representation of warranty as to the accuracy of the figures or prices and disclaims any liability resulting from any inaccuracy. 

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers.

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.