COLLARD Generally speaking, markets love to have lots of different moving parts to focus on. There is certainly no shortage of these as we enter 2019. Globally, there is the US economy, growth, government shutdowns and future moves by the US Federal Reserve. Elsewhere, there is slowing Chinese growth, Brexit, trade wars, talk of a recession in Italy – the list goes on.

LOFTING I think the market is reacting normally to a lot of uncertainty, whether that be the outlook for US short-term rates, US-China trade tensions, Brexit or – domestically – a weaker housing market.

FAJARDO For the last couple of years we have been talking about global synchronised growth, and now we are seeing many global economies slowing down – including Japan, Europe and China. The US is the outlier but this has been driven by fiscal policy. At the same time, tighter monetary policy in the US and geopolitical risks, such as trade conflicts and Brexit, have seen volatility increasing significantly.

TRIGONA I agree with this, including the fact that most if not all of us were well ahead of our issuance programmes coming into the new calendar year. We can pick our moment to issue – and this is going to be even more crucial than it was in 2018. As an example, when we issued our green bond last November the timing was conducive to a relatively larger deal than may have been possible two weeks later.

KENNEDY The most consistent thing we’ve seen through the recent part of the cycle has been volatility, and this is the product of global markets adjusting to a decreased pool of liquidity. QE has been taken off the table, central banks are adjusting their balance sheets and interest rates are being raised in some markets – and yet the debt profile is still expanding. This is causing considerable dislocation in long- and short-term funding markets, as well as in credit.

NICHOLL Every year starts with a view on how it will be different from the previous one. But we saw a lot of volatility going into the end of 2018 – I was surprised to see the extent of the rally in Australian sovereign bonds building toward the end of last year.

NICHOLL It’s always hard to tell. We had a buyback and matching tender in mid-January and while the coverage was alright the pricing didn’t look particularly strong. There is certainly a lot of volatility out there and it’s hard to pin down exactly what is causing it.

CINQUINA Markets would have felt until recently that they had a fairly good handle on how 2019 might look in Australia. There was a decent consensus that the next RBA move would be up – though we didn’t see it that way, and still don’t. We have seen a bit of movement in recent weeks that suggests market participants are starting to think cash rates will be unchanged at best and lower at worst.

TRIGONA We have the same view. We’re keeping a close eye on macroprudential policy and its impact on the housing market. But it’s very hard to predict a rate cut, because the RBA will be very reluctant to do it.

FAJARDO The market has gone from pricing in hiking, in November 2018, to predicting rate cuts, in January 2019. Our view is that the two biggest domestic risks are the consumer and housing sectors while globally our biggest trading partner, China, is slowing. Even so, we still think the RBA will likely be on hold at least for as long as inflation is muted and employment growth remains reasonable.

NICHOLL What I hear from investors suggests it would certainly be a big call for the RBA to cut, particularly when growth is around 3 per cent and the possibility of another external shock in the next 18-24 months sits over us. I think the RBA will remain cautious.

LOFTING It is scary to think we might be starting an easing cycle at 1.5 per cent. A couple of moves would signal a very negative backdrop, so I think the cash rate will remain on hold. One would have to think the hurdle for the RBA to cut is very high.

CINQUINA I think the RBA would want to see the result of the federal election and what the new policies around housing and tax are. This is a real risk: there is a lot of exposure to this part of the market for households and if the election goes the way the polls are suggesting and the policies being proposed are implemented there are obvious implications.

NICHOLL I don’t know how anyone could have the view that global conditions will return to what they were pre-2007. Worldwide, there is a lot more debt. The share of income for labour remains relatively low and without a structural uplift in productivity growth I don’t see the underlying dynamics for global demand and growth changing that much.

TRIGONA It is the new normal.

COLLARD I agree. The economic and interest-rate cycles are now very different from what they were 10-20 years ago. The textbooks are being rewritten.

NICHOLL Obviously, we will perceive rate shifts relative to different points within a range. But I see the range as being lower overall and possibly tighter than it was previously.

KENNEDY All issuers’ chief strategic objectives should be access to markets, which means they need to be aware of all the factors that might prevent access. For Australian semi-government issuers, this conversation has always centred on investor diversification. The challenge is that diversification is not always entirely in issuers’ own hands.

LOFTING I agree that it is a lot more difficult than it was a couple of years ago. The first part of 2018 was good, with regular demand in our space from Japanese investors which underpinned what a lot of issuers in our sector were doing, particularly at the long end of the curve.

NICHOLL This underlying dynamic has to be putting pressure on spreads for semi-government paper.

TRIGONA Early January 2019 is quite a contrast to the start of 2018, when Queensland Treasury Corporation (QTC) was able to get out early in the new year with a large primary-market deal. Conditions definitely feel different.

LOFTING Speaking today, in mid-January, the issuance and pricing numbers might not be much different from last year or the year before but the market tone definitely seems muted. It may be like that through this year.

NICHOLL The feedback we consistently receive is that liquidity in Australian Commonwealth government securities remains very strong. This is not always the case in the linker market, but it varies across time and by investor.

FAJARDO Investors have always had a focus on the relative value of semi-government bonds to alternate assets – be it to bond, global supranational, sovereign and agency or swap.

CINQUINA Our sense is that bank investors have become more nuanced. They are still participating but I agree that it more often comes down to relative value. If a deal is at the right level they will be there.

LOFTING The biggest balance sheets all operate differently now, too, and we don’t see them all coming into the same transactions. We may see one or two but we don’t tend to see them all, because they have different positions and views on relative value.

KENNEDY In my view forthcoming regulatory changes, such as APS 221, will cause bank spreads in the senior space to widen further. The unintended consequence of trying to improve banks’ regulatory capital and reduce their interdependence will in my opinion be the big hurdle to the continuation of the negotiable certificate of deposit (NCD) market.

FAJARDO These comments all come through in distribution data. The 2029 trade we completed in October last year was the largest fixed-rate semi-government deal in our market since 2011. The older deal was also a QTC trade, so I compared the books and found them to be quite different. The 2011 deal didn’t have as diversified an investor base as we get now.

TRIGONA That’s an interesting point. This time last year we would have been talking about what would be the next investor base for our bonds – and it has turned out to be Australian fund managers.

LOFTING The 2021 deal we did last October had no bank treasury participation at all.

COLLARD We have a similar story. Our only foray into the domestic term-debt market in 2018 was a long 10-year, fixed-rate bond. This was distributed entirely to real-money accounts – in our experience domestic real-money investors have been super supportive.

KENNEDY My sense is that it is because superannuation pools are continuing to grow and asset managers are broadening their mandates to hold a greater proportion of fixed income in their portfolios, versus their traditional overweight exposure to equities.

PALMER Another part of it is probably that there has been a widening to government spreads. The last big transaction we did – which may be a little different because it was a green bond – was allocated 70 per cent to asset managers.

FAJARDO The relative value of semi-governments to sovereign bonds is the highest it has been for a few years. The extra 55-60 basis points over government bonds in the 10-year part of the curve is certainly appealing to investors.

NICHOLL Not noticeably. We saw bank balance sheets buying a lot more of our paper up to mid-2018 but this seems to have abated. We don’t expect a repeat of this going forward, because – as has been noted – their asset-accumulation is all but complete. Fund managers have been fairly consistent. They tend to stand out more in the linker market and the new 2050 inflation-linked bond had a large asset-manager allocation.

TRIGONA We saw the same names involved but with far larger tickets. They were much more committed than they were a year ago.

CINQUINA I wonder whether the reduction in bank balance-sheet participation makes asset managers look comparatively more active. Although this is probably not the case in the New South Wales Treasury Corporation (TCorp) green bond, given its size.

TRIGONA We printed A$1.8 billion (US$1.3 billion) and real-money support was certainly very evident.

CINQUINA We only did one syndicated transaction in 2018, of which 50 per cent went to real money and 17 per cent to bank balance sheets. A further 38 per cent was placed offshore, which was a good result in the circumstances. As I say, my suspicion is that perhaps higher asset-manager participation was a reflection of the waning interest of bank balance sheets.

FAJARDO We had 70 per cent real money in our 2029 deal. The majority was domestic and it really helped drive the book. Another change we noticed was that these investors came in early and strongly.

TRIGONA We noticed this too. Getting early momentum is very important.

TRIGONA Demand from Japanese investors was very strong in the first quarter of 2018 but it waned as the year went on.

COLLARD The Japanese market has been an important part of Export Finance and Insurance Corporation (Efic)’s funding strategy in various forms over the past 25 years.

KENNEDY New flows into Japanese funds have all but dried up, especially from the traditional retail funds. There is still money invested but not pools of new money. Our data analysis indicates that during 2014-16 Japanese investors held 10-15 per cent of semi-government issuers’ total outstandings. Now that proportion is closer to 5-7 per cent. Japanese investors have halved their exposure to Australia over the last 2-3 years, in other words.

FAJARDO Japanese demand seems to be a bit skewed to the currency view at the moment rather than on a hedged basis, given it’s not as attractive as we have seen previously. We hear there is less Australian dollar product being sold thanks to higher allocations to US dollars that are being driven by the negative spread. It’s important to note, though, that we are not seeing any large selling as a result of this.

TRIGONA We were aware of some selling that occurred towards the end of last year when Australian dollar-yen hit ¥83 (US$0.74). But now it is around ¥77-78 and we expect to see some demand coming back.

FAJARDO We are also seeing some significant investors move to the double-A space from triple-A, looking for higher yield and more liquidity. While this has not been fully represented in syndicated, primary-market participation, we have had some instances of large reverse-enquiry tickets from these investors.

NICHOLL We have to be pragmatic about the outlook for Japanese investors, though. The reality is that November 2018 was the largest month for selling in our market by Japanese investors since 2013.

NICHOLL Yes, and it is true for most sovereign bond markets. But we certainly felt it, and the data confirm it has been happening across our market.

FAJARDO It is more challenging on a relative-value basis when you look at these factors. But the feedback we get from investors is that they are still very comfortable with the Australian economic story.

NICHOLL How comfortable they are with the outlook for the currency is another important point. I think there is an increasing tendency for Japanese investors to do unhedged investing, and their view on the currency will strongly drive this activity.

LOFTING We had a pool of around A$2 billion (US$1.5 billion) of suitable assets when we issued our green bond in 2016 but we didn’t need A$2 billion of funding.

PALMER TCV was the first in the market and it was a very good transaction at the time. The Australian green-bond space was much smaller then.

LOFTING Exactly. We did A$300 million and that was taking every dollar available from every green-bond investor in Australia. We had a couple of London-based funds as well, but there wasn’t any ‘green money’ left on the table.

FAJARDO When we issued our green bond we only had an asset pool of A$1 billion so there was a constraint on the volume we could issue. This has now grown to more than A$4 billion – so there is certainly capacity.

LOFTING Yes, this is an additional benefit. Investor interest and understanding on what is in the pool and the kinds of assets they like and dislike has changed dramatically from when we did our transaction.

NICHOLL The trade-off for the growing pool of funds available will be that the bar for investor expectations gets higher. The AOFM has no current plan to issue green bonds but it is increasingly clear to me that European fund managers in particular have growing mandates for environmental, social and governance (ESG) investments. My guess is that at some point in the future all sovereigns will have to look at meeting these mandates in some way or another.

LOFTING The challenge is finding assets that meet investor requirements and recognising that what the requirements are now will likely change over time.

PALMER Absolutely. The transparency was always there but the requirement for specifics around impact investing is increasing. During our green-bond roadshow there were very specific questions about assets that we hadn’t expected. We are certified under the green-bond standards so there is a roadmap, but the questions went beyond this.

FAJARDO The experience we have had on our recent roadshows suggests the green theme is an area of increasing interest for Japanese investors, too. But, as with any other deal, demand conditions need to align with when we want to execute.

TRIGONA Our experience is that Japanese investors don’t always participate in primary as they don’t always have the funds to invest on the day. When the Japanese investors have funds to invest they tend to tap our bonds and we will issue into this specific bid.

FAJARDO There are scale limitations because of the pool of assets required. On the demand side, I don’t believe dark-green demand really grew between our trade and TCorp’s. It is growing in Europe but I think we would only really access this with a euro-denominated deal.

NICHOLL I think demand will reach a saturation point more quickly than assets can be developed to meet the requirement.

FAJARDO QTC has benefited from having large, liquid benchmark lines. The constant message from investors has been that they like this depth, and we see green bonds as a complement to this. We have become a programmatic issuer of Climate Bonds Initiative-certified green bonds, which streamlines the process for future issuance.

FAJARDO Developing the market is also about moving investors from light to dark green or from nongreen to green. You have to approach the market with this in mind rather than only looking for dark-green investors.

TRIGONA There are reporting costs to consider, too. It is not as easy as issuing a benchmark bond where there is no ongoing reporting requirement once it is completed.

LOFTING The investor diversification is important, though. I imagine TCorp’s experience was similar to ours in that the level of engagement with investors is much greater on a green deal.

PALMER Similar to QTC, the focus for TCorp is still on highly liquid benchmark lines. But I also agree with Justin Lofting that the diversification angle is important. Even if the dark-green investor set remains small the ability to tap into this sector is one of the advantages of green-bond issuance.

TRIGONA These investors are also more likely to be sticky. If they are going to sell, it is unlikely that the green bonds will be the first bond they sell.

LOFTING For us it was not just about price. One of the benefits of the green-bond process was that it allowed an alignment of Victoria’s values as a government and its investments in addressing climate change with investors globally that want to invest more in this space. This alignment across TCV, our clients and our investors allowed us to engage more deeply with our stakeholders. This doesn’t necessarily mean our funding levels will be better than they were, but the level of engagement is better and there is more investor diversity.

PALMER Our programme was set up as a sustainability programme so we can do green, social or a combination thereof. We are looking to map to the UN Sustainable Development Goals (SDGs), which is what a lot of investors are also mapping to.

CINQUINA It was certainly an impressive trade and I was also impressed to hear that TCorp found 15 new investors. We are looking at the sector but we don’t actively have projects in train that would result in issuance in the near future.

COLLARD Efic continues to monitor the green space but, to date, we haven’t had sufficient suitable assets to warrant this type of funding. However, Efic does engage in responsible lending and upholds social and environmental best practice in the transactions it supports.

KENNEDY Any government – federal or state – is mandated by the people to be fiscally, socially and environmentally responsible in everything it does.