It pays to stay active: rotation is key as Australian credit spreads tighten
Helen Mason
Spreads are tightening for Australian corporate bonds despite high issuance volumes, Schroders portfolio manager fixed income, Helen Mason says.
“This dynamic provides evidence of the growing depth and maturity of Australia’s corporate bond market which is continuing to draw investors from overseas as well as Australia given the health of the market and the Australian economy,” Mason said.
“While the credit cycle is constructive for investors in Australia, risks persist in the US, where both equity and credit valuations are a concern. The current US central bank policy stance is unlikely to alleviate these valuation excesses for credit in the near term.”
“In addition, the uncertainty surrounding economic data and growth from the world’s largest economy raises the prospect of increased global market volatility, should macroeconomic conditions disappoint. This situation warrants ongoing vigilance from investors.”
Australian seaports stood out as a sector of strength, reporting record 2025 financial year results despite flat trade throughput and ongoing uncertainty around global tariffs.
“Ports continue to demonstrate the resilience and income stability that investors seek in infrastructure assets,” Mason said.
Landlord-style operating models, where port authorities derive revenue primarily from land leases and service charges, supported EBITDA margins exceeding 80 per cent. This was achieved even as bulk commodity volumes declined.
Recent port issuances, including Port of Melbourne’s $400 million 7-year note and Port of Newcastle’s $300 million 8-year bond, were both heavily oversubscribed, highlighting the continued investor demand for high-quality infrastructure assets.
With AUD spreads tightening, offshore deals such as the 5-year USD National Broadband Network (NBN) and 7-year EUR Singapore Power Assets (SGSPAA) transactions offered compelling relative value and continued to attract active participation from Australian investors.
“Strong fundamentals across Australian credit and infrastructure continue to underpin demand. We’re seeing the market reward quality and diversification, both locally and offshore,” Mason said.
With the phasing out of retail bank hybrids, known as Additional Tier 1 (AT1), Mason is encouraging investors to consider corporate bonds for their portfolios. While retail bank hybrids were popular with retail investors, their phasing out means investors will need to find replacement securities.
“AT1 retail bank hybrids have been very popular with retail investors for their attractive returns, franking credits, and perceived safety and so, retail investors hold an estimated 30 per cent of the retail bank hybrid market in Australia,” Mason said.
“Now is the time for retail investors to think about reallocating their retail bank hybrid exposure to Australian high yielding credit and the outlook for robust returns in certain sectors is good.”
“We think that with the Reserve Bank of Australia on hold most likely until next year, elevated all-in yields will continue to attract offshore demand and support both the technical dynamics and issuer supply pipelines in the Australian credit market,”
“Barring any macroeconomic shocks, we see spreads continuing to grind tighter into year-end. The RBA’s pause provides a supportive backdrop, and elevated all-in yields should continue to attract offshore buyers,” Mason said.
