Darryl Bruce

Recent investment grade bond issues are delivering healthy gains for investors, with many new issues trading above par and many outperforming expectations, Darryl Bruce, executive director, capital markets at Income Asset Management (IAM) says.

Mr Bruce says the current wave of new issuance across investment grade bonds is creating an ideal environment for investors looking to build a diversified fixed income portfolio.

“While the new issue process can be frustrating for investors, particularly with rapid bookbuilds, oversubscription, and the tightening of final pricing, the results speak for themselves,” Mr Bruce said.

“Recent deals have performed strongly, not just in the primary market but also in secondary trading.”

Bloomberg data below shows that many investment grade bonds issued over the past three months are trading above par, with most sitting between 101 and 104. One standout issue, BCPE 6.5618 per cent 2035c, is already trading near 105 despite being on the market for less than two months.

Source: Bloomberg

“The issuers aren’t the only winners in this process,” Mr Bruce said.

“These early capital gains, combined with annual income returns in the high 5 per cent to low 6 per cent range, clearly demonstrate that investors can come out ahead, even when initial pricing appears tight.”

The outlook for fixed income remains compelling. Although the Reserve Bank of Australia (RBA) held the cash rate steady in July, market expectations point to three rate cuts by February 2026 as the economy broadly slows.

Mr Bruce said this creates an ideal setup for traditional bond strategies, locking in current high yields and benefiting from capital appreciation as rates fall.

“On the macro front, we’re seeing a cautious but favourable shift from the RBA. Although the RBA held the cash rate steady in July, market pricing now incorporates expectations for at least two cuts before the end of the year and a potential third in early 2026,” Mr Bruce said.

“That evolving outlook strengthens the case for locking in today’s yields and positioning for capital appreciation as rates retreat. The days of 6 per cent + coupons may be behind us for now, but even bonds issued at 5 per cent are performing exceptionally well.

“Demand remains strong, and we expect the new issue market to continue delivering solid returns and liquidity for investors.”

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Matthew Macreadie

As the Australian Prudential Regulation Authority (APRA) plans to phase out Australia’s $43 billion hybrids market over the next seven years, investment-grade credit and corporate bonds provide an attractive and stable income stream, according to Matthew Macreadie, executive director of credit strategy and portfolio management at Income Asset Management (IAM).

“With hybrids gradually disappearing from the market, investors who rely on them for income certainty must adapt, and increasingly they are seeking reliable alternatives,” Mr Macreadie says.

“Corporate bonds, particularly investment-grade credit, offer an excellent alternative, offering yields between 6 per cent to 7 per cent per annum, ensuring continued access to predictable returns while maintaining a strong credit profile.

“As hybrids are phased out, there’s a clear gap for income investors seeking simpler and more effective forms of capital,” he says.

Mr Macreadie anticipates that demand for investment-grade bonds will surge as more investors seek safe, predictable income streams, against the background of greater market volatility and the phasing out of hybrids, which have long been favoured by retail investors due to their high-yield characteristics.

“With more reliable alternatives now available, corporate bonds, especially those with strong credit ratings, are a good way to continue earning consistent returns while reducing risk exposure,” Mr Macreadie says.

“These bonds not only offer income but also provide a solid investment-grade buffer, making them a stable choice for conservative investors who once turned to hybrids for yield.

“By reallocating into corporate bonds, investors can improve portfolio diversification and mitigate the risks tied to the winding down of hybrids.

“Corporate bonds represent a prime opportunity for investors to still access predictable income with minimal risk of capital loss,” Mr Macreadie says.

“IAM recently launched two Single Bond ETFs to fill this gap, offering investors access to a single underlying asset and providing exposure to interest payments and capital preservation, and are seeing strong inflows off the back of its launch.

“These new strategies are catering to the growing appetite from Australian investors for fixed income products that have lower volatility than equities and a greater level of income than cash and term deposits. This allows investors to easily access fixed income solutions and transition seamlessly from hybrids to more traditional forms of credit investment.

“We expect more products to come to market in 2025, as the demand for credit products is expected to rise given greater volatility in equity markets. Credit returns are less subject to variability and uncertainty compared to equities. With share markets down this year, bonds could do better, especially if we see a slowing in economic growth and interest rates fall even further in 2025 or 2026.”

The Australian share market has dropped around 2.7 per cent over the year to 24 March. In the US, equity markets have also dropped, led by technology shares, with the Nasdaq Composite Index down around 5.8 per cent over the year to date, and the S&P 500 down 2.0 per cent.

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Jenna Hayes

As private credit funds fill the lending gaps left by banks, the asset class’s rapid expansion is not without risks, with concerns growing that fund managers may be taking on riskier loans to maintain momentum, says Jenna Hayes, head of sales capital markets at Income Asset Management (IAM).

“The accelerated growth in private credit, largely due to increased regulatory constraints on banks post-GFC facing more stringent lending criteria, could have unintended consequences as some funds take on riskier business lending,” Ms Hayes says.

“Private credit has filled that gap. But like anything, when you experience rapid growth, the risks aren’t always going to be understood, especially as the asset class is far more complex than investors think.

“Some private credit funds are growing so quickly that in order to deploy their cash, they must say yes to deals they may have said no to in the past. There’s more risk than meets the eye here.”

While private credit has been an attractive option for investors looking for diversification, Ms Hayes cautions that many Australian investors may not be achieving the balance or returns they had expected.

“One of the reasons investors are drawn to private credit is diversification. However, in our experience, Australian investors are overweight in equities and property as it is. So, if your private credit fund is investing in real estate, then you might not be getting those benefits of diversification that you may think you are,” she says.

In response to these evolving market dynamics, investor sentiment is shifting towards publicly traded fixed income assets such as bonds, as stability becomes a key priority.

“We are seeing a flight to safety into government and corporate bonds. Investors are not necessarily moving into cash, but away from equities, and we are seeing greater flows into bonds,” Ms Hayes says.

“The returns on investment-grade bonds are yielding between 5.5 – 6.5 per cent, which is higher in some cases than the dividend yields of ASX 200 stocks.”

According to Ms Hayes, credit investments are set to play an increasingly important role in investors’ portfolios, especially given renewed equity market volatility. The Australian share market has dropped around 2.7 per cent over the year to 24 March. In the US, equity markets have also dropped led by technology shares, with the Nasdaq Composite Index down around 5.8 per cent over the year to date, and the S&P 500 down 2.0 per cent.

As investors reassess their portfolios in search of stability, IAM stresses the importance of fully understanding the complexities of private credit and ensuring that diversification strategies align with actual market exposures.

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Darryl Bruce

The new issuance market has been in full swing in recent weeks. New bond issues are coming thick and fast and all, without exception, are being met with very strong demand. It is exciting to see the AUD bond market grow into a deeper and more liquid market, in line with what we see in many other developed nations.

In the investment grade space, there has been a flurry of activity from the State Governments. Treasury Corp Victoria (TCV), Queensland Treasury Corp (QTC) and New South Wales Treasury Corp (TCorp) have all recently tapped existing longer dated fixed rate issues. Offering returns in the low to mid 5% region, I think that these looked highly attractive as a long-term hold within diversified portfolios.

Elsewhere in the investment grade market we have seen issuance from local companies including IAG, Liberty Financial, Transgrid, HSBC, NBN and Port of Brisbane together with so-called Kangaroo issues from Nestle and Banco Santander.

On the syndicated loan front, it has been very busy. We have limited supply of Foxtel, which is offering a very attractive return given the strength of the credit. We also had another US$10m loan offering which was filled in record time. If this level of demand continues, I expect that we are likely to see a lot more supply in the syndicated loan space. On that point, I am expecting to see more syndicated loan supply this week, which is also likely to be met with strong demand.

In the high yield market, MoneyMe launched a $130m issue last week. This is a large issue for the AUD unrated market to digest, however, it also was met with strong demand, which saw the orderbook filled very quickly.

As you can see, there is plenty going on, whether you are an investor that favours the stability of investment grade, or one that likes the additional yield on offer in the syndicated loan or high yield markets.

By Darryl Bruce, executive director of capital markets

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Darryl Bruce

It’s no secret it has been a busy few years in the interest rate market. In April 2022 the RBA cash rate was still languishing at 0.1%, an astonishing low rate it had been sitting at for almost 18 months. Just over a year later, in June 2023, the cash rate stood at 4.1%, representing the equivalent of 16, quarter of a percent, cash rate increases. One further hike in November 2023 took the cash rate to 4.35%, where it still stands today. One of the big winners from this jump in interest rates has been people with cash on term deposit (TD).

We are now at a turning point for interest rates. Some economists believe more rate hikes are required to fully temper inflation, yet many corners of the economy are clamouring for cuts to help ensure we don’t enter a protracted slowdown.

Despite the fact that RBA rate cuts are likely to be a few months away we have already started to see many banks cutting their TD rates.  Recently we saw the latest of the Big 4, ANZ, cut their term deposit rates by up to 0.9%. The best rates from the Big 4 now stand at c.4.75% and that is only for periods of less than one year. This is partially due to the outlook for rates, but also due to the fact that the banks source some of their funding from offshore. Some of this funding will have become cheaper as rates have been cut in other countries, notably the US. This is great news for mortgage holders with some slightly cheaper mortgages becoming available however this has also pushed down term deposit rates. Having said that, there are still a few TD opportunities from smaller ADIs offering returns of c.5%. That is a solid return for an investment that is effectively government guaranteed (sub $250k).

So, why not simply fill the defensive part of your investment portfolio with TDs yielding up to 5%? Having a portion of your portfolio in cash, or near cash, always makes sense and while the headline returns look attractive at present, you have to consider refinancing risk. This can work in your favour in a rising interest rate environment, but it will work against you as rates fall. You may be able to secure a 6 – 12-month TD with a rate close to 5% now, but what will the return be when you look to roll the TD? Nobody knows, but it seems highly likely that returns will continue to drift lower.

Enhance your income with bonds

In contrast, high quality bonds can provide more stable returns over a longer time frame. You have the opportunity to lock in attractive returns now, which will help to effectively ride out the interest rate easing cycle. If you’re looking for predictability of income there are fixed rate bonds (which pay a known fixed income) offering returns of 5% – 6% over the next 5 – 10 years. Alternatively, the income on floating rate bonds is calculated as a margin over the Bank Bill Swap Rate (BBSW). BBSW moves broadly in line with the cash rate over time, so you can also expect your income to move up and down with the cash rate. With the cash rate expected to fall, now might not seem to be an opportune time to invest in floating rate bonds.

However, the income on some of these bonds is currently very attractive, in the 7% – 7.5% range. Yes, the income is likely to fall but we will need to see several 0.25% rate cuts before the income falls below 6%. So if you think the RBA cutting cycle might be relatively shallow then you may well be better off allocating to floating rate notes.

The chart below reflects this situation together with the markets expectations in relation to moves in the cash rate. You can lock in an income of 6% through a fixed rate bond issued by QBE (BBB rated) or alternatively you can secure a higher income now through an ANZ floating rate issue. The ANZ issue will generate a comfortably higher income over the period, with the QBE bond only closing the gap at the beginning of 2026.

Source: RBA Rate Tracker

What is the additional risk in bonds vs term deposits?

Term deposits are very safe and it tends to be an investment truism that higher returns come with higher risks. In the case of investment grade corporate bonds this additional risk can be quantified. Rating agency Standard & Poor’s publishes an Annual Default Study which shows the annual expected default rate on different rating bands. The A and BBB rating bands offer the best balance of risk and return (see table below). AAA rated bonds have the benefit of effectively having a 0% default rate however the returns reflect that and are very low, lower than TDs in some cases. For example, Australian Government bonds (AAA) are offering c.4.0% for a 2-year bond and c.4.49% for the 15-year maturity.  In A and BBB rated bonds you take a small amount of additional risk to generate a meaningfully higher return.

Longer term returns of 5% – 6%+ in A and BBB rated bonds are available yet the average annual default rate in A rated bonds is 1 in every 2,000 bonds and in BBB it is 1 in every c.700. So, yes, there is some additional risk but it is very small, especially when compared to the additional return on offer. Even in the most extreme circumstances, going back to 1981, the default rate was 1% in BBB – 1 in every 100 defaulted. So the additional risk is still well contained even in a highly stressed environment.

How flexible are bonds vs TDs?

Prior to the GFC it was not too hard, or too expensive, to break term deposits however regulators saw this as a vulnerability in banks. If investors started losing confidence in a bank they could pull their funding by breaking TDs, and that just put the banks under even more liquidity pressure. Now it is much harder and more expensive to break TDs.

This provides certainty of funding for banks, but it leaves little flexibility.

In comparison, bonds have an actively traded secondary market. The liquidity in large investment grade bond issues is relatively good which is a significant advantage over TDs.

Now is the time to move cash into bonds

TD investors have been one of the big winners from higher interest rates but that tide has already started to turn. While there are still some attractive returns on offer in TDs the opportunity to lock in higher returns for longer, thereby avoiding short term refinancing risk, makes investment grade bonds very attractive at this point in the cycle.

You will be well rewarded through the higher returns available in bonds, especially given the relatively nominal increase in risk. The greater flexibility of bonds, through a liquid secondary market, also provides some peace of mind if you’re wary of locking capital away for extended periods.

By Darryl Bruce, Executive Director – Capital Markets

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Tony Perkins

Income Asset Management (IAM) has launched a new asset backed securities (ABS) and residential mortgage-backed securities (RMBS) product, ABS-RMBS Direct, offering investors direct access to this income-generating asset class, and has also appointed industry veteran Tony Perkins as head of structured and asset backed securities to lead the initiative.

“With the launch of ABS-RMBS Direct we are further expanding the range of investment solutions we offer to our clients,” said IAM Co-Head of Capital Markets Kyle Lambert.

“This launch reflects our commitment to providing access to diversified investment opportunities that deliver strong risk-adjusted returns for Australians. With the addition of Tony Perkins and his extensive expertise in structured finance and asset-backed securities to the team, we believe this new product will deliver significant value to investors,” he said.

ABS and RMBS are investment products backed by a pool of receivables such as auto loans or mortgages. These securities offer investors regular income across a range of risk and return profiles depending on the underlying receivables and their position in the capital structure.

Mr Perkins brings over three decades of experience in the financial services industry to the new role, specialising in structured finance, asset-backed securities, and debt capital markets. He has held senior leadership roles at prominent institutions such as UBS Investment Bank and Bluestone Home Loans and was most recently a partner in corporate advisory at Prime Financial Group.

“Mr Perkins’ expertise in originating, structuring, and managing asset-backed securities will be instrumental in ensuring the success of IAM’s RMBS offering,” said Mr Lambert.

Mr Perkins said joining IAM and leading the development of ABS-RMBS Direct, allows for the launch of an investment class which will pay relatively high yields to investors.

“This is a significant opportunity to provide investors with access to a robust asset class with very attractive risk-return characteristics. IAM is committed to providing its clients with the knowledge and tools necessary to make informed investment decisions in the RMBS market,” he said.

“For those investors wanting higher yield, and with a higher risk appetite, yields range from a spread over the bank bill swap rate of 2.5 percentage points up to a spread of 6 percentage points. Over decades in Australia, even the highest yielding ABS and RMBS have virtually never lost investors a cent,” Mr Perkins said.

The global asset-backed securities market, which includes ABS and RMBS, is a substantial investment sector. S&P Global Ratings forecasts a global issuance volume of approximately US$1 trillion over 2024.

In Australia, the ABS and RMBS markets play a crucial role in funding financial receivables, with an outstanding value of approximately ~$200 billion. A significant proportion of home and car loans, trade receivables, and personal loans are funded through ABS and RMBS. The big four banks, second tier banks, building societies and non-bank lenders use the ABS and RMBS markets to raise funds from all parts of the world.

“Evidencing the credibility of the ABS and RMBS markets as a funding mechanism for ADIs, the issuance of ABS and RMBS is overseen by Australia’s banking regulator, APRA. Furthermore, and with few exceptions, ABS and RMBS are rated by at least one of three global credit ratings agencies,” said Mr Lambert.

IAM’s ABS-RMBS product is competitively positioned with a management fee of just 0.35 per cent a year, providing investors with cost-effective access to primary and secondary market offerings.

“This low fee structure, coupled with Mr Perkins’ expertise, makes IAM’s ABS-RMBS product a compelling option for investors seeking attractive yields and diversification within their fixed-income portfolios,” said Mr Lambert.

“Large scale ABS and RMBS funds typically charge investors ongoing fees of 0.50 per cent to 0.90 per cent a year, plus platform fees and bid-ask spread upon entry and exit, so our pricing will be more attractive. We expect that our competitive pricing will help to draw investors,” he said.

IAM’s ABS-RMBS product provides investors with several other benefits, including the ability to select from various credit risk levels, return profiles, and monthly interest payments to align with individual investment goals. The product also offers investors with the potential to benefit from higher yields compared to traditional fixed-income investments with a similar risk profile.

“Investors will benefit from predictable income and will receive monthly interest payments and principal repayments over the life of the security, and we are delivering full transparency regarding credit ratings, associated risks and expected returns,” said Mr Lambert.

The new service will complement IAM’s suite of fixed income products including term deposits, investment grade bond funds, and ASX-listed fixed income and senior secured institutional loans.

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