Jenna Hayes
Strong and growing demand from domestic and international investors alongside a broadening base of issuers, including debut participants from Europe and Asia, are strengthening the case for Australian fixed income, Jenna Hayes, executive director capital markets at Income Asset Management says.
Hayes says Australia has now surpassed both the Sterling and Canadian debt markets to become the world’s third-largest fixed income market by issuance, trailing only the US dollar and Euro markets
“When you weigh up the benefits of the Australian market, such as being one of only 10 countries in the world with a sovereign rating of AAA, deep and liquid markets, and solid fiscal policy, it’s not a surprise why we finally seeing Australian markets on the radar of international investors.
“Rising investor interest is, in turn, giving issuers the confidence to come to market, which is boosting the supply side. It’s a virtuous cycle where with this increased issuance comes more liquidity, which gives investors and issuers more confidence.”
Australian bond markets have undergone rapid shifts following recent softness in labour market data. The spike in Australia’s unemployment rate to 4.5 per cent in September saw markets increase the probability of an RBA rate cut at the November meeting from 44 per cent to above 80 per cent.
Hayes says that Australian investors, who have historically been overweight in property and equities and underweight in fixed income, are increasingly looking for corporate bond exposure. In the past for true corporate diversification, they needed to turn to more developed fixed income o markets like the US whereas now they can look closer to home for a broad range of issuers including more recently names such as Transgrid, Ausnet, Aurizon and Melbourne Airport
“Australians have always been underweight in bonds, so it’s encouraging to see fixed income become a staple within investors’ portfolios, and I think the demand side will remain,” Ms Hayes says.
“On the supply side, it’s Wriston’s Law of Capital that capital will go where it is welcome and stay where it is well treated.”
“We have seen a lot of offshore issuers tap this market in the past twelve months and have signified their intention that they are going to be repeat, regular participants in our market.”
Hayes says there has been an active period of bond issuance, pointing to a standout hybrid issue from Lendlease (ASX:LLC) that drew strong investor demand.
“The new Lendlease corporate hybrid is particularly attractive due to its 100 per cent franked distributions, significant yield of around 7.4 per cent, and investor-friendly structure such as an unusually large coupon step-up after three years.”