Helen Mason
A looming supply squeeze in Australian financial subordinated debt is creating a compelling market opportunity, according to Schroders’ Head of Credit, Helen Mason, with billions of dollars of securities being removed from the market in the past month as investor demand remains strong.
A$5.4 billion of Additional Tier 1 (AT1) and Tier 2 securities were called in June alone, while more than A$10 billion of financial subordinated debt is scheduled to be called before December.
At the same time, new issuance from Australia’s major banks is expected to slow over the remainder of 2026, creating a growing reinvestment challenge for investors and a potentially supportive backdrop for valuations.
Mason said the imbalance between shrinking supply and persistent demand had created a particularly strong environment for financial subordinated debt.
“The technical setup for financial sub-debt remains among the most compelling we have seen in some time,” Mason said.
“We are seeing several factors happening. Major bank issuance is slowing, billions of dollars of existing securities are being called, and investor demand remains persistent.
“More than A$10 billion of financial sub-debt is scheduled to be called before December, which is expected to further reduce available supply into year-end. For investors looking to reinvest that capital, the challenge is going to be finding sufficient supply”, she said.
The supply imbalance comes as Australia’s broader corporate credit market continues to attract significant investor demand despite geopolitical and macroeconomic uncertainty.
Corporate bond issuance is already close to setting an annual record with half the year remaining, driven in part by record issuance from offshore “Kangaroo” borrowers.
A recent A$1 billion wholesale hybrid transaction from CDC Data Centres was almost six times oversubscribed. And Volkswagen (VW) priced a A$250 million senior unsecured Kangaroo bond, adding to already substantial outstanding issuance of over A$3 billion in the domestic market.
Mason said the pace of issuance was a strong signal of the depth and resilience of the Australian credit market.
“Against a backdrop of significant geopolitical and macro uncertainty, the Australian credit market continues to print deals at a remarkable pace,” she said.
“Yields remain high, performance has been solid and credit quality is exceptional. The level of demand for quality investment-grade issuers at the right price remains very strong.”
Looking ahead, Mason expects primary market supply to slow over the coming months as offshore issuers retreat during the Northern Hemisphere summer, and Australian corporates and financial institutions enter pre-results blackout periods ahead of the August reporting season.
“Reduced net supply into a market with persistent reinvestment demand should provide a constructive backdrop for credit spread performance through the quarter,” said Mason.
“While macroeconomic data is beginning to show tentative signs of softening, we do not expect material credit stress to emerge across the investment-grade universe in the near term.
“The Australian corporate credit market’s skew towards defensive infrastructure and utility issuers should also help insulate investors from some of the broader macroeconomic risks.”