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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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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US interest rate cuts on the horizon.

With the prospect of interest rate cuts on the horizon in the US, corporate bonds have started to perform well with the market already pricing in the cut expected in September, offering investors income and the opportunity for capital gain when the US Federal Reserve (the Fed) starts to lower interest rates, according to Darryl Bruce, executive director of capital markets at Income Asset Management. 

“It looks like the US might be on the cusp of interest rate cuts in September, with an 85-to-90-per-cent chance of a rate cut priced in from the Fed that month,” Mr Bruce said. “Being at the top of the interest-rate cycle, it is likely that money going into the fixed income markets now will reward investors over the coming years as rates move lower.”

With yields on investment grade bonds hovering above 6 per cent, Mr Bruce added that investors are being lured into this asset class by relatively high returns.

“We are seeing strong demand for new bond issues. We’ve come from an environment a few years ago where yields were much lower and now, in the investment grade part of the market, we’re seeing yields of 6 per cent-plus. That is driving a lot of investor interest. We recently saw that with a tier-two bond issue from Spanish bank giant Santander. We are also seeing plenty of issuance from the big four banks in Australia,” he said.

“Santander’s order book was over $4 billion. They only ended up issuing $600 million of bonds in Australia and we would have liked to have seen them issue a little bit more. The coupon came out very close to 6.5 per cent, which is probably 50 basis points higher than we’re seeing on coupons for big Australian issuers, such as the banks. 

“The Santander issue was only rated one notch weaker at Triple B-plus. This is good compensation for investors for the risk. It is also good to see a big global bank like Santander come into the Australian market to issue bonds,” he said. 

According to Mr Bruce, with yields sitting relatively high on investment grade debt, it is a good time to be investing money into the corporate bond market.

“We’re talking to clients and one consistent message we give is to look at where yields are now. Using the Santander issue as an example; if you can lock in a coupon of 6.5 per cent for the next five years from a from an institution of Santander’s quality, that’s 6.5 per cent return per annum for the next five years from a defensive asset in your portfolio. That’s a good outcome, and it is clear that money going into the bond market right now will reward investors over the coming years. 

“That’s the story that we’re talking about to investors.”

Mr Bruce also sees healthy outcomes for carefully selected private credit assets, which historically have offered an illiquidity premium over corporate bonds, which are publicly traded.

“In the higher yield loan environment, we see some great opportunities in the private credit market, and we’ll continue to access that market,” he said. “Investors are picking up an extra 3 per cent or so return for going into some private credit assets compared to bonds, over a three-year period. Liquidity is a bit less of an issue for a three-year period so the payoff is attractive,” Mr Bruce said.

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Ms Labib, says the new appointments bring additional fixed income experience and expertise to the IAM team, and mark IAM’s strategic expansion into Perth, extending its reach beyond its existing offices in Sydney, Brisbane, and Melbourne.

Darryl Bruce joins as Executive Director and Head of Western Australia for IAM. Mr Bruce was most recently at FIIG Securities’ where he was state manager for WA, and will spearhead IAM’s entry into the West Australian market.

Ms Labib says: “Darryl brings over 20 years’ experience working in the financial services sector across Australia, UK and New Zealand to the team.

“He has an established track record in fixed income investing and, importantly, in managing a small team as a business. He is a great addition to IAM as we mark our entry into the WA market,” she said.

Accompanying Mr Bruce in WA will be Ellen Allardice who joins as Associate Director-Capital Markets. Ms Allardice was previously an associate director at FIIG Securities.

IAM has also made new appointments to the fixed income sales team in Sydney including Victor Gugger, Sandra Ang, Frederick Stewart, and Nick Lowings.

Mr Gugger brings over 30 years’ experience in financial markets across Sydney, Hong Kong and London to the role.

Ms Ang joins IAM from NAB where she was a Senior Investment Relationship Manager.

Mr Stewart, Mr Gugger and Mr Lowings join from FIIG where they worked for over 6 years in the private clients team assisting investors manage their fixed income investments.

In Brisbane, Harry Roberts joins the sales team as Associate Director.

Ms Labib says that IAM is seeing very significant growth in enquiry from advisers nationally, looking for a transparent way to buy income assets.

“Rates have been rising and competing growth assets face head-winds, it is a great market for Fixed Income.

“Against this backdrop, IAM has forged partnerships with platforms like HUB24 and Netwealth and is proactively building a powerhouse team to capitalise on these favourable market conditions.

“IAM has a vision for the sector’s growth and is committed to bringing client-focused fixed income solutions to Australian investors and establishing a firm foothold as the pre-eminent fixed income broker in Australia.

“With the addition of these new appointments, IAM is well on the way to achieving that goal.”

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