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Just as decades of immigration have made Australia’s major cities hives of multiculturalism, a healthy level of diversity is starting to develop in Australian local bond markets. More global issuers are making their way onto Australian bond shores, issuing fresh rounds of debt in the Australian dollar (AUD) market and thereby making local benchmarks more diverse.
And it’s not all one-way traffic. Another large trend is the increasing level of Australian ‘ex-pat’ issuance – a growing group of Australian banks and non-financial corporates (“corporates”) turning to overseas bond markets for funding and issuing debt in other currencies.
What do these trends mean for Australian bond investors and how can investors adapt?
Multiculturalism in Australian bonds Fifteen years ago, 93% of bond issuance in AUD came from institutions domiciled in Australia.1 Since then, we have seen a significant increase in issuance by non-Australian issuers in AUD such that today, over 20% of the Australian Composite indices are made up of issuers domiciled offshore. 2
Excluding government issuance, the trend is even more dramatic. According to the Reserve Bank of Australia (RBA), ‘non-residents’ currently form the largest segment of the non-government bond market in Australia, and the trend looks set to continue (Figure 1).
This change has had a dramatic effect on the make-up of Australian credit indices. The concentration of Australian issuers in the Bloomberg AusBond Credit Index has dropped from almost 90% to 55% in just five years (Figure 2). When incorporating supranationals’ issuance in AUD, the figure drops to just 27%. 3
Turning to Australian ‘ex-pat’ issuers, the figures are even more pronounced. Over 90% of issuance from non-government Australian entities is in non-AUD currencies (Figure 3).4 Australian issuers have generally found offshore markets to be deeper and more liquid than the domestic market, which has allowed for larger debt issues. Despite the growing size and diversity of the AUD bond market, global markets will likely remain attractive for Australian issuers to raise capital for this reason.
Australian bond market diversity: unequivocally a good thing We find the greater level of non-Australian-domiciled issuance in Australia has been a positive step on a number of fronts.
First, it has made the domestic bond market far more liquid and deep, which allows for greater confidence by both foreign and local issuers to issue in AUD. Increasing issuance by global corporates and supranationals can be seen as an endorsement of Australia’s bond markets.
Second, this issuance has provided a broader opportunity set for investors in the AUD bond space, with more opportunities for diversity of credit, yield and capital appreciation. Domestic issuance in foreign bond markets also allows for increased opportunities as investors can potentially tap into favourable pricing differentials that arise between similar securities issued in AUD and in foreign currencies.
Finally, with greater issuance by non-Australian entities, local bond benchmarks become more attractive to foreign investors, which encourages further capital flows to Australian markets and improves Australian issuers’ ability to raise capital.
Managing Australian fixed interest in 2015 and beyond For investors, the reality stemming from these issuance trends is that investing in Australian fixed interest increasingly requires a global perspective – much more so than in the past. Of course, dedicated domestic expertise remains vitally important to ensure coverage of local trends, domestic credit issuance and fiscal and monetary developments. However, this capability on its own is no longer sufficient for modern Australian bond investing.
With Australian credit investing, for example, coverage of the Composite AUD benchmark requires coverage of not only the current 159 Australian corporate issues, but also the 107 corporate bonds from issuers in 15 different countries, as well as the 159 supranational and agency issues in the indices – in all, some 266 non-Australian issues from 83 different issuers.5 As a result, all the skills, global experience and dedicated resources required to make a successful global credit manager are also prerequisites for successfully managing Australian bonds.
A global view is also essential to understanding the implications of foreign capital flows and their effects on the Australian market. According to AOFM data, two-thirds of Australian Commonwealth Government Bonds are held by non-residents,6 a figure largely held up by Australia’s stable AAA rating; capital movements by these foreign investors could have a significant effect on Australian bonds.
Finally, with the extraordinary influence of global central bank monetary policy in the current environment, a global view and an understanding of the effects of policy on the Australian market have never been more important.
Following from this, it’s clear that the process for managing Australian fixed interest needs to include (1) a meaningful global view of macroeconomic themes, including central bank policy, (2) global trading capabilities to uncover relative value and understand fund flows and (3) global expertise for credit coverage.
PIMCO’s approach to Australian fixed interest PIMCO’s approach to investing in Australian bonds has always involved a unique blend of domestic expertise and global coverage. We believe that this approach – combining global macroeconomic, top-down views with bottom-up research and analysis from local experts – hits the sweet spot for finding attractive investment opportunities in Australian fixed interest.
The Australian team, which is ultimately responsible for the management of Australian portfolios, consists of sector specialists and generalists, with experts in every sector of the Australian bond market. They rely on PIMCO’s global teams for a number of important insights:
Head of Australia, Co-head of Asia-Pacific Portfolio Management
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