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.”

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Jenna Hayes

As private credit grows into a global asset class exceeding $1 trillion, investors in a maturing credit cycle must adopt smarter strategies to balance yield with resilience, Jenna Hayes, executive director, capital markets at Income Asset Management says.

With cash offering minimal returns, Hayes says rushing into deals risks overpaying for weaker assets. Instead, she highlights senior secured syndicated loans as a compelling, defensive option for wholesale high-net-worth investors.

“Senior secured syndicated loans give investors the ability to access high-yield opportunities, often above nine per cent per annum, while maintaining defensive characteristics in their portfolios,” Ms Hayes says.

Despite regulatory scrutiny, including ASIC establishing a dedicated taskforce and releasing a discussion paper on the systemic risks of private markets, Hayes says the outlook for private credit remains constructive when managed with discipline.

“Private credit, done well, benefits both the economy and investors,” Ms Hayes says.

“The key is ensuring there are frameworks in place and that investors are selective in how they deploy capital.”

Direct investment in syndicated loans offers significant advantages, including timing flexibility, transparency, and direct control over credit quality, collateral, and covenant protections. Unlike pooled funds pressured to meet deployment targets, direct ownership allows investors to underwrite each loan on its merits.

“Syndicated loans are structured with ongoing maintenance covenants, scheduled amortisation and cash-sweep provisions that help protect investors in a downturn,” Ms Hayes says.

“They are secured by large asset bases and strong cash flows across diverse sectors, from infrastructure to financial services.”

Looking ahead, regulatory changes such as APRA’s phase-out of hybrid bonds by 2032 and proposed Division 296 tax changes are expected to further drive demand for income-focused investments.

“As likely RBA rate cuts eat into term deposit returns, investors are seeking yield stability and tax efficiency,” Ms Hayes says.

“Syndicated loans offer a powerful trifecta of yield enhancement, credit quality and diversification, which can be particularly valuable in a late-cycle environment.”

Ms Hayes said that as regulatory scrutiny intensifies and markets face greater uncertainty, the appeal of syndicated loans for wholesale investors will continue to rise.

“In an era defined by late-cycle uncertainty, the ability to generate premium income without sacrificing resilience is invaluable,” Ms Hayes says.

“That’s what makes syndicated loans such a compelling opportunity for investors today.”

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Jenna Hayes

The market outlook for bonds and equities is strong, and investors can look forward to good returns on their super funds in coming years, according to Jenna Hayes, executive director of capital markets at Income Asset Management.

“Income assets, like bonds, will help manage a higher tax bill arising from Div 296 tax liability. In terms of corporate bonds delivering attractive returns, the recent Macquarie Bank and Melbourne Airport bonds offer good investment opportunities,” Ms Hayes said.

“The recently issued Macquarie Bank 10yr bond paying a fixed coupon above 6 per cent unsurprisingly saw strong demand. As interest rates fall and inflation continues to moderate, it’s a perfect time to lock in bonds paying strong fixed returns.

“The corporate hybrid market has exploded this year. We are seeing unprecedented demand from clients for this product, given the pick-up in yield over senior paper for strong investment grade issuers. Melbourne Airport is one example, which was well received by our client base”.

Hayes noted there has been a strong appetite for corporate bond issuance in recent months.

“We have seen bumper issuance in May and first half of June. There are too many to name, but our picks of the month are the bonds issued by One Rail Australia, Barclays, Next Era Energy and Melbourne Airport to name a few” Ms Hayes said.

“Issuers are milking opportunities in the corporate bond market. In terms of the big banks, we are likely to see less T2 issuance this year. But there is a lot of other corporate issuance and secondary opportunity for investors.”

According to Hayes, the Reserve Bank of Australia (RBA) is likely to cut interest rates several times this year.

“We are now within the RBA’s target inflation band of 2 per cent to 3 per cent and currently markets are pricing in a high likelihood of a July rate cut, with a cut 84 per cent priced in.  By this time next year, markets are pricing in four more cuts from the prevailing 3.85 per cent cash rate, but I think that is a little bit optimistic,” Ms Hayes said

“If these additional cuts eventuate, this means investors will be seeing even less income from their cash investments. That is likely to boost the appeal of corporate bonds for the reliable income they provide.”

Approximately 80,000 Australians who will face higher superannuation taxes on higher balances as significant changes to Australia’s superannuation system come into effect.

Superannuation account earnings for individuals with balances above $3 million are expected to be taxed at a higher concessional rate of 30 per cent, with that rate rising from 15 per cent on the portion of earnings attributable to the balance above $3 million. The changes are expected to be introduced in the coming financial year if the legislation passes through the Senate.

“While 80,000 people are likely to be immediately affected by this change, that number is forecast to grow significantly in coming years and it could rise to 500,000 in coming decades, so the implications of this change could be very broad,” Ms Hayes said.

“While these legislative changes were due to start on July 1, 2025, that will likely be pushed back because the legislation needs to be redrafted and go back to the new parliament. Still, we do have a lot of investors, especially high net-worth individuals, who are assessing what this change means for them. Some are considering taking money out of superannuation and putting it instead into defensive assets like corporate bonds, to avoid being charged that incremental 15 per cent on their super contributions where they have high balances.”

While the superannuation legislation had faced delays under the previous Labor Government, particularly over the taxing of unrealised gains and the non-indexation of the $3 million threshold, the passage of the legislation is now more likely with Labor’s increased Senate presence.

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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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