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
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:
- Global macroeconomic outlook, driven by PIMCO’s Cyclical and Secular Forum process. At our quarterly forums, PIMCO’s investment
professionals from around the world come together to discuss global economic and political developments and debate their effects on the financial markets.
The firmwide views that result from the forums drive our global interest rate, sector and currency views.
- Credit coverage of global names and industries. More than 60 credit analysts spread across regions and across industries ensure coverage
of global names issuing into the AUD market.
- Capital flows in and out of Australia’s bond markets. Our domestic team gets insights from each of our trading desks and regional
portfolio committees, including the Asia-Pacific Portfolio Committee which provides unique insights into capital flows through Asian channels.
- Trading of Australian corporate names in different currencies. Having dedicated trading desks situated in all major trading regions
across the globe allows for direct access, best execution and real-time analysis of issuance by Australian corporates in offshore markets.
1Bloomberg AusBond Composite 0+ Index, as of 31 July 2000
2Bloomberg AusBond Composite 0+ Index, as of 31 July 2005
3Bloomberg AusBond Non-Government Index, as of 31 July 2015
4Barclays Capital Multiverse Index (Non-Government, Australian issuers only), as of 31 July 2015
5Bloomberg AusBond Composite 0+ Index, as of 30 September 2015