Australia's place

While global geopolitical risk dominates headlines, Australian debt capital markets have in 2017 arguably had their most promising start in several years. Conversations at the KangaNews DCM Summit took in all the key market themes and the bigger picture affecting industry participants now and in the future.

“From the IMF to the Bank of England, forecasts were for a severe financial crisis if the UK left the EU – including a stock and housing-market sell off. What we saw was a very quick currency correction with the stock market going up 30 per cent over the last 13 months and the housing market remaining resilient. Investors moved on very quickly.”

“Our discussions around what Europe was five years ago and what it is today are very different. But I feel no sense of panic among investors. If you consider investor distribution of our bonds in US dollars to be the barometer of sentiment, there is no demonstrable change to the profile. Investors around the world continue to buy us.”

“I find it next to impossible to envisage a uniform monetary policy when in one country a five-year corporate loan costs 5 per cent for a given credit quality and in another it costs just 2 per cent. A levelling of credit spreads is going to be part of the agenda for the foreseeable future. To me this implies quantitative easing of some kind.”

“Australia is one of the most highly indebted sovereign economies that we rate and it persistently runs current-account deficits. This means the economy has a high vulnerability to sudden changes in risk perception by offshore investors. There are mitigating factors, which is why we still have the triple-A rating, but we see this as Australia’s key vulnerability.”

“It is tough to tell northern-hemisphere investors that a fiscal deficit of 3 per cent of GDP is devastating. But it’s about where the deficit is going, not where it is right now. This said, even though investors ask us about Australia’s triple-A rating they don’t give the impression they won’t buy Australia without it. Part of this might be that, as we all know, there are not many triple-A sovereigns left.”

“It is important for us to articulate to investors why we want to issue at 10 years. It is about managing a maturity profile that reduces the risk for the overall organisation, which is credit positive for all bondholders. There is a trade off in price terms so the reality is we need to be balanced in our issuance.”

“In recent years, the Australian dollar market has become fragmented, with the proliferation of the EMTN format and an increase in bonds issued under global documentation. These other formats are tapping into alternative pockets of demand that may not be reached locally. But, as good as these deals are, the main event in Australia remains Kangaroo or domestic issuance.”

“The AOFM has always closely monitored term premia although it is something we have to estimate. From our research, we have observed a degree of reflation in the term premium since November. This may
go some way to explaining the increase in term interest rates we have seen.”

“We are cautious about how far the market has come and about whether the grind lower in spreads will continue, and this is something we are watching carefully. We need to balance the need to issue when times are good with our desire to grow the balance sheet. While I wouldn’t say we have front-ended our funding we have made sure that we are in quite a strong position.”

“The US is clearly on the interest-rate hiking path but following the March hike 10-year US Treasury yields fell. So it is not a given that if the Fed is hiking rates this makes Australian dollars less attractive.”

“Is perception of liquidity one of huge daily turnover or one where participants can get in and out of the market as they need? If it is the latter, I have never had anyone tell me they can’t find a home for TCV stock. In fact, what I hear is ‘don’t get short in the semi market as you might not be able to get your position back’.”

“When the size of our borrowing programme was smaller, we would have been able to fulfill it in one or very few markets. However, for strategic reasons, we placed a great emphasis on continuing to offer our products to a global investor base, and Australia was one of our strategically important markets. So my advice would be to try to stay connected with global investors even if your programme is small.”

“Consistent principles were applied to the way we approached the market before the HQLA regime was introduced. One can think of HQLA as a one-off impact which has now matured. Now we can go back to the way we were always looking to manage our investors and appropriately diversify our investor sources.”

“People forget that if our spreads compress relative to the US and nothing else changes the Australian dollar will soften. There is a pool of investors that bought our paper when the Australian dollar was weaker and we haven’t seen many return to the market.”

"Blockchain has been very successful at what it was designed for: cryptocurrency. There has been a deluge of pilots and good ideas but I struggle to think of any other use cases that are financially significant. This is because blockchain principles need an entity to act as an intermediary to bridge between blockchain and the real world."

“People underestimate the regulatory overheads, the security issues and the privacy and compliance problems. When you put all this together you find blockchain is only really solving one very small part of the problem. This is probably why these systems weren’t streamlined 20 years ago. It isn’t as easy as blockchain proponents claim.”

“The world of liquid securities is getting smaller and the world of illiquid ones is getting bigger. Unless we get some relief via the softening of upcoming regulatory developments, I would suggest banks will no longer be principal traders within fixed income. In this scenario they may well, for all intents and purposes, disappear from these markets entirely.”

“Perhaps all market participants need to have their own absolute view of upfront pricing. Only then will we get a lot of eyes on a wide range of securities and a potential uptick in liquidity, because people understand the fundamental worth of what they are holding.”

“Approximately 25 per cent of our secondary-market semi-government trading is executed through Yieldbroker. However, most of our trading is on a bilateral basis. The screen allows us to respond to bank axes, to gather market intelligence and to execute strategy ideas. But we find the discrete bilateral nature of larger-sized transactions provides us with tighter pricing.”

“We currently capture 2,600 Australian dollar denominated securities in our liquidity data set, which has been in testing with the domestic investor base for the last eight months. Over that period, nearly 80 percent of the universe in scope did not trade. In the absence of observable trade activity, the market has become increasingly reliant on evaluated pricing.”

“Globalisation of fixed income has already happened. Last year, Australian corporates issued almost twice as much in offshore markets as onshore. So Australian investors clearly need to look outside the local market, particularly in the corporate sector where if they want to build any kind of diversity in portfolios they have to be looking at hedged bonds from other markets.”

“I have been trying to get an illiquidity premium for 20 years. Thanks to the globalisation of the Australian market we can’t get a premium because we are competing with margins that are largely set throughout the US and Europe. Liquidity is a moveable feast, but one thing that is certain is that the price of liquidity has increased. It may still be there but it costs more to access it.”

“Even though they are some of the highest-rated banks globally, we have a negative outlook on Australian major banks. This reflects increasing household leverage when there is relatively high underemployment and low wage growth. Increasing debt at a time of weaker household income growth is an aggravating factor to any other kind of external event.”

“Funding markets are probably as good as we have seen them for a very long time. All the major banks have been very successful in markets around the world and in all parts of the capital structure. The diversity, depth and current levels of support are encouraging, and are important if we are to be able to continue operating in the new regulatory environment.”

“If you look at the granularity of investors into our US dollar bonds, we are seeing investors that typically only historically invested into yen, euro or sterling product. In the past we all talked about diversity as being where we had to hit all these currencies, but this is changing. We may see a reversion in terms of specific currencies depending on events around the world, but demand for US dollars is no longer centred on fund and money managers in the US.”

“A funding-only RMBS transaction has very little appeal for us in the current environment. Our breakeven point was that a capital-relief transaction just got over the line relative to senior. Absent this, one would argue the amount of capital relief from an RMBS transaction is tiny, if not inconsequential.”

“Eighteen months ago, investors were quite apprehensive about the TLAC regime. They were concerned about how it would work and where our funding would come from. In the greatest-single change in the current environment, investors now ask us: ‘Will you issue some TLAC?’”

“Liquidity has been declining in RMBS instruments and demand is falling, particularly as bank balance sheets refrain from buying at the levels they used to. With the economics, unless there is a sensible outcome on a capital-relief trade there is not much else to make it compelling. We will nevetheless continue to issue funding trades, but they are a small part of our total issuance.”

“There is a lot we would like to know about ‘unquestionably strong’ and over the course of the next six months we expect to hear more from APRA. But ‘unquestionably strong’ needs to be dealt with before we can start moving into really thinking about TLAC.”

“Asian interest in our US dollar transactions is probably the greatest change of the last few years, with demand much larger and far more consistent. The level of allocation we can place into Asia is now relatively predictable and provides a great deal of confidence going into the US open. We have also been fortunate that US domestic investors have continued to have a high degree of confidence in the Australian banking system.”

“There are potentially some quite meaningful NSFR-provoked changes on the business side, because it is a prescriptive standard around the term of funding. Some of the discretion that global banks have previously enjoyed in how they measure apparent duration of funding has changed. We have carried out quite a lot of work into this in treasury, but there remains more to do in terms of the wider business.”