AI investment and the hunt for yield to drive Australian credit markets in H2

James Tsaousidis

The hunt for yield and accelerating investment in artificial intelligence (AI) infrastructure will shape Australian credit markets in the second half of the year, according to Schroders.

Investment analyst James Tsaousidis says the Australian reporting season will be the catalyst for credit markets, with investors closely watching corporate issuance, forward earnings guidance and the continued expansion of AI-related infrastructure.

“We expect higher-yielding Australian credit to remain well supported over the coming months,” said Tsaousidis.

“Demand for quality yield continues to outweigh supply, and while reporting season should generate new issuance, if higher-beta supply remains limited, the favourable technical conditions that supported markets through July are likely to continue.”

Tsaousidis said the biggest theme remains the rapid growth of AI and the infrastructure supporting it.

“The extraordinary level of investment from global hyperscalers, including Amazon, Microsoft, Meta and Alphabet, is reshaping global credit markets,” he said.

“While Amazon’s recent US$25 billion bond issue tested investor demand in the US market, Australia’s AI story is only just beginning. The overwhelming demand for CDC Data Centres’ inaugural senior secured transaction demonstrates investors are increasingly looking for exposure to the infrastructure underpinning the digital economy.”

Tsaousidis said the search for yield should support subordinated financial and corporate debt.

“With Australian inflation easing and interest rate expectations remaining relatively stable, credit continues to offer attractive income opportunities,” he said.

“We remain positive on financial Tier 2 debt and selected subordinated corporate securities. That imbalance between supply and demand should continue to provide a supportive backdrop for the sector.”

This was most clear in July, when investors competed for a shrinking pool of higher-yielding bonds. Barclays’ perpetual non-call six-year AT1 bond was among the month’s strongest performers, with its credit spread tightening by as much as 40 basis points as demand outstripped supply.

Looking ahead, Schroders expects the strongest opportunities to remain in high-quality companies with resilient cash flows, while monitoring emerging pressures in Australia’s retail private credit market.

“The challenges we’re seeing across parts of private credit, such as pressure from commercial property exposures, higher borrowing costs and increased regulatory scrutiny, reinforce the value of quality, liquidity and transparency in listed credit markets,” Tsaousidis said.

“Those issues are largely confined to private markets, and we remain confident that high-quality public credit offers an attractive balance of income and resilience as investors navigate an uncertain macroeconomic environment.”