A new era for Australia bonds

Global investors are having an “a-ha” moment for Australian credit.

In past years, Australia was sometimes overshadowed in the Asia-Pacific bond market by issuers from North Asia, as China dominated offshore issuance in the region and global investors were keen to take exposure to its fast-growing economy.

This dynamic is rapidly changing, and new flagship bond indices have emerged, adding credits from other Pacific nations such as Australia and New Zealand that had previously been left out of Asia-centric benchmarks.

In response, investors across Asia and beyond have increasingly looked to integrate Australian assets into their Asia-focused investment strategies, and the benefits have been felt by newcomers to the market, such as commodities producers and services businesses, and established players like the well-capitalised banks, which are some of the country’s largest offshore bond issuers.

Over the past year, global asset manager AllianceBernstein has increased investment into Australian U.S. dollar-denominated debt, as part of its diversification efforts in their emerging-market Asia strategy.

Diwakar Vijayvergia, Director of AllianceBernstein’s Asia Credit Portfolio Management, said he has been investing more capital into top-quality Australian corporates and banks, both sectors that he said offers better returns compared to their Asian peers.

Overall, these Australian borrowers have been able to highlight the appeal of investing in Australia on their own merits, and also demonstrate how they can be used as a gateway to leverage Asia’s rapid economic growth.

Rising demand for Australia’s debt coincides with a backdrop of solid economic fundamentals.

Over the years and throughout the pandemic, the country’s resources and services industries have been able to demonstrate economic flexibility through the ebbs and flows of its largest trading partner, China, Moody’s said in a report last year.¹

In fact, Australia’s annual economic growth is expected to rebound to 2.3% in 2025², which is one of the fastest paces among the G-20 advanced economies, after a dip this year due to higher interest rates, said Saranga Ranasinghe, a Moody’s Senior Analyst at the Corporate Finance group.

The country also has a growing population and stable financial institutional policy, all factors that currently underpin its Triple A credit rating from the major global rating agencies.

“Australia ticks a lot of boxes for investors looking for exposure within the broader Asia Pacific markets,” said Andrew Duncan, Managing Director and Head of DCM at HSBC Australia.

“It’s a smart play to follow Australian credits, which not only showcase sound and transparent companies, but in many cases offer compelling value given how tight much of Asia is trading.”

The attention on Australia accelerated particularly in the past two years, after a slowdown in China’s economy and a recent string of credit events in the country forced investors to adjust their portfolios by diversifying them with credits that span the entire Asia-Pacific region.

During this time, Australian issuers began fielding a noticeable uptick in the number of physical meetings and roadshow requests from investors looking to fulfill their Asian credit exposure. Michael Momdjian, General Manager of Treasury and Corporate Finance at Sydney Airport, said the issuer has experienced an increase in demand from regional and global investors.

This was evident in a recent deal. For example, the order books on its €1bn bond deal issued in April peaked to around €8.5bn, representing the largest peak order book ever achieved in a euro-denominated deal by an Australian corporate across all tenors. Several orders exceeded €100m.

The overwhelming response allowed the issuer to sharply revise pricing by 40 basis points from initial price thoughts on both the 8 and 12-year tenors.

The peak orders were nearly double the volumes reached in a similar deal in 2023, Sydney Airport’s Momdjian said.

“This increased demand is underscored by our recent deal also pricing over 5 basis points through fair value of our existing Euro bonds, implying a negative new issue premium,” he added.

Biotechnology company, CSL Limited, served as yet another example of robust demand for Australia with a US$1.25bn deal in March, where hefty orders from Asia helped it build a final order book of US$8.1bn. The deal priced about 5 basis points inside fair value across both the 10 and 30- year tranches, which priced at 87 basis points and 102 basis points respectively over corresponding U.S. Treasuries.

Appetite for Australian bonds in other major Asian currencies such as the Hong Kong dollar via private placement deals has also increased, with the number of deals more than doubling so far this year versus 2023.

Regional investors, flush with liquidity due to rapidly growing wealth from Asia’s burgeoning middle class, have also started deploying significantly more capital into Australia, including bonds issued in Australian dollars. Some Australian-dollar deals have seen nearly a third of their bonds allocated into Asia, according to HSBC’s Duncan.

Strong participation from Asia-dominated Telstra Group’s A$1.2bn dual-tranche senior unsecured deal in February, where Asia-based investors accounted for 42% of the 7.5-year tranche and 22% on the 10-year portion, a result that followed a successful roadshow in Hong Kong, Singapore and Tokyo.

By the end of 2024, Australia’s international bond sales could surpass the $80 billion sold last year, Mr. Duncan said. Robust growth is also expected in the Australian dollar-denominated bond market, where volumes have doubled since the pandemic, according to HSBC estimates.

The domestic bond market used to suffer from a dearth of liquidity at the long end of the curve, but currently, plenty of issuers and investors find pricing appealing at the 10-year mark. This has been evident by a recent string of successful deals in the domestic bond market, including from Sydney Airport, which in April sold a record-breaking A$850m issue, one of the largest 10-year bonds ever issued by an Australian corporate in the currency and with one of the strongest price tightening from initial price thoughts this year.

Telstra’s A$750m 10-year bonds issued in February was an early sign of appetite rising at the long end of the curve, as investors became eager to lock in higher interest rates. The telecommunications provider, which runs Australia's largest mobile network, conducted roadshows in Asia’s major cities ahead of a dual-tranche deal announcement that also included a 7.5-year tranche.

In addition to competitive price tightening from initial price thoughts, Telstra was able to gain access to a wide spectrum of investors across the Asia region that included high-quality orders from real money accounts.

Defaults elsewhere in the region have led investors to look more closely at risk versus reward, and investors have found Australia’s corporates and banks to offer relatively attractive pricing on their bond issues compared with similarly rated peers in Asia.

This premium has diminished due to a recent increase in investor appetite, but still exists.

In addition, Australian corporates are positioned to benefit from growth elsewhere in Asia - for instance, its commodities companies will see their exports increase as China’s manufacturing sector rebounds.

Duncan forecasts the robust momentum in Australia’s bond sales to extend into 2025. Some of this issuance is likely to come from Australian banks raising debt to meet regulatory requirements on total loss-absorbing capacity (TLAC), said AllianceBernstein’s Vijayvergia. TLAC bonds fortify a bank’s coffers and helps them weather stress scenarios.

In anticipation of this, investors were likely to deploy more resources to increase coverage of Australian corporates and financials, he said.

“The diversification that Australia provides will remain a key driving force for investors to continue to increase exposure to Australia,” he said.