Many investors underestimate the size of the fixed income market. Globally, bonds account for nearly…
Although Australia is geographically distant from other major economies around the world, the continued economic and financial integration with other countries has resulted in marked changes in the Australian financial landscape, which is particularly evident in the fixed income market.
Going back to 2000, 93% of non-government AUD bond issuance was from Australia-domiciled issuers, since then, offshore issuers have significantly stepped up their presence in the local market and today, they make up 35% of the Bloomberg AusBond Composite 0+ Index, as shown in Figure 1. Notably, issuers from the US lead the pack.
Figure 1. Issuer Breakdown by Country of Domicile
Source: Bloomberg AusBond Credit 0+ Index, from 31 August to 29 September 2017, BondAdviser
According to RBA data, “non-residents” has been the largest segment of the non-government bond market in Australia since 2013, and the trend looks set to continue (see Figure 2 below).
Figure 2. Non-Government Bonds on Issue in Australia
Source: RBA, ABS, excludes ADI’s self-securitisation
At the same time, as Australia is a net-importer of capital, Australian companies are also heavily tapping offshore fixed income markets for funding. This is mainly because offshore markets tend to be deeper and more liquid than the domestic market, which has allowed for larger debt issues. Another reason is that local bank loan spreads have decreased, making loans a preferential local funding source. For these reasons, despite the growing diversity of the AUD bond market, global markets will likely remain attractive for Australian issuers to raise capital.
The two-way diversification illustrated above bring a number of benefits to the Australian economy. First, it has made the local bond market more liquid in general, allowing for greater confidence by both foreign and local issuers to borrow 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. Issuance in foreign bond markets also allows for increased opportunities as Australian issuers can potentially tap into favourable pricing differentials that arise between similar securities issued in AUD and in foreign currencies. Overall, the positive feedback effect enhances the attractiveness of the local bond benchmark, encourages further capital flows to Australia and improves local issuers’ ability to raise capital.
As the Australian fixed income market integrates deeper with the rest of the world, it is imperative that any credit analysis be carried out not only with expert local coverage but also with a global view of macroeconomic themes including central bank policies and global trading trends & fund flows.