Global bond investors and traders responded with incredulity, followed by the rational action of fleeing the Gilt market in droves. Nominal yields across the medium and long maturity spectrum rose by more than 100 basis points “in a matter of days”, according to the BOE, and volatility persisted for an extended period.

The Gilt market impact meant UK pension funds with liability-driven investment (LDI) strategies fell subject to margin calls on their derivatives positions. In a dash for cash, they sought to sell assets via bids wanted in competition (BWIC) auctions, effectively seeking the least discounted prices available on a raft of high-quality but often little-traded asset classes.

To the surprise of many, Australian asset-backed securities (ABS) and residential mortgage-backed securities (RMBS) emerged from the forced sell-off as something of a star performer.

Andrew Cunningham, Sydney-based director, securitisation at Commonwealth Bank of Australia (CBA), explains: “Our sector always carried the reputation of relative illiquidity compared with others. But the extra supply that was pumped in was absorbed, primarily by major domestic investors, with plenty of bids and no significant discounting. This is firm proof that, while regular flow is uncommon, when surplus supply comes in there can be appetite without stress consequences.”

Anthony Moir, Sydney-based treasurer at Pepper Money, tells KangaNews: “Investors were faced with a hard choice: they needed to liquidate bonds and they had to figure out which asset classes they could get the best price for. The answer was Australian RMBS and ABS.”

Market sources say paper from many jurisdictions was discounted by 20-30 per cent in the BWIC process while the equivalent figure for Australian-origin securitisation issuance was 0-2 per cent. This was despite significant volume of activity: Moir reveals that approximately A$500 million (US$333.1 million) of Pepper Money paper alone was traded, at an “extremely high” price. Cunningham adds that Pepper Money was the biggest individual component of approximately A$2 billion of original face value CBA saw in BWICs.

Perhaps even more surprising was the performance of mezzanine notes. Moir tells KangaNews he expected there would be some opportunistic buyers seeking discounts given the volume of sales. However, “it definitely was not a buyer’s market, which we found unexpected”, Moir adds.

The BWICs outcome has been positive for Australian issuers as it helped persuade investors that were wary of Australian securitisation’s illiquid reputation to give the asset class fuller consideration. Since the sell-off, Pepper Money has been able to print significant volume of new issuance even through periods of significant volatility.

“We are witnessing investors participate where previously they would have deemed our transactions to be an illiquid asset,” Steven Fischer, Sydney-based deputy-treasurer at Pepper Money, reveals.

This is part of what Pepper Money believes to be a growing interest in Australian RMBS and ABS that includes greater international participation across the capital stack. Moir points out that some of the larger sellers have returned strongly. He believes the positive experience of being able to sell bonds during the liquidation process has also heightened the buy-side focus on public, rather than private, opportunities.

Cunningham adds: “A lot has happened since the back end of last year. The market now looks very healthy. Whether it is spreads moving or covers on deals we are witnessing, it is a positive issuance environment.”

Moir describes the liquidity experience as a supportive factor that is working in concert with solid fundamentals to encourage international interest in Australian product. “The other factor that is probably just as important is credit performance in the Australian asset class,” he says. “If an investor overlays strong performance of portfolios with a more liquid bond it explains why we are starting to see pretty good activity in the market.”