Expanded market capacity for financial institution issuance was well-established by the end of 2023. A significant amount of time at the annual roundtable for heads of funding at the big-four banks, hosted in December by KangaNews and RBC Capital Markets, was devoted to local currency growth. Funders talked about the incremental climb of record deal sizes and the banks’ growing confidence that they will be able to source a greater proportion of their wholesale funding tasks at home.

It is not the majors that have led the charge in 2024, however. Record deal size, as of the start of March, is still at the A$5.5 billion (US$3.6 billion) issued by ANZ Banking Group last year. If anything, the big four have been very slightly less active in Australian dollars at the start of the new year. Diverse domestic and international financials have stepped into the breach to drive record volume.

The statistics are clear but they do not tell the whole story. Speaking to issuers and leads on many if not most of the bank transactions done in January and February, a consistent message emerges: they were expecting issuance to go well – but not this well. One issuer told KangaNews it was sufficiently upbeat about market conditions to set out with confidence of achieving a record print size in its latest deal, but the scale of demand led it to nearly double even that ambitious volume.

Attention switched to true corporate issuers at the end of February, and after the glut of financial issuance there must have been at least some concern that near-term liquidity had been soaked up by the banks. If this concern ever emerged, however, it can only have lasted for minutes. The first few corporate deals attracted books of a scale simply never before witnessed in the Australian dollar market.

Some data points illustrate the change in dynamics. The all-time largest corporate deal print in Australia remains the A$2.25 billion priced by Apple in 2015. That final deal size was almost exactly the same as the volume of bids received by Perth Airport for its A$300 million capped seven-year transaction from February this year.

The most recent of the jumbo global corporate deals in Australia was a A$1.25 billion print by Verizon Communications in March 2021. The book for this deal was A$1.45 billion – or barely one-third the volume of bids Telstra attracted to its A$1.2 billion print, also in February 2024.

Telstra’s deal included the largest corporate 10-year tranche ever issued in Australia, at A$750 million – from a book of A$2.85 billion for this tenor. The print did not even dent buy-side capacity, as Brisbane Airport attracted the same volume of bids for its 10-year deal just two days later.

Outside the senior-unsecured space, the securitisation market has also started the new year on a tear. The dilemma facing issuers in this sector seems to be whether to take the best bids on the table, which often come from joint lead managers, or persevere with a wider investor marketing task. Either way, there is no shortage of demand – much of it coming from very different investors from those driving bank and corporate bond transactions.

The great unknown is how much of this growth is here for a long time rather than a good time. There are reasonable grounds for caution.

Domestically, it has been suggested that system growth represents a reallocation by institutional investors – especially in the superannuation sector – into fixed income as a response to higher rates. The fear here is that as and when the Reserve Bank of Australia re-enters cutting territory – as it is widely expected to do in the next few months – the biggest pool of local money will drift back into its previous somnambulance when it comes to the fixed-income asset class.

While there is no doubt at least some element of market timing involved, I have a little more confidence in the stickiness of this component of domestic demand. Even at the most emaciated allocation, the outright volume of the fixed income component of every working Australian’s 11 per cent of salary each month eventually had to reach a tipping point.

Anyone over 30 when compulsory superannuation was introduced, meanwhile, is now in or approaching retirement. The long-awaited pivot to income assets may finally be showing its face in market drivers.

Whatever the story domestically, Asian demand has arguably been an even bigger talking point among deal intermediaries this year. Historically accounting for perhaps 10-20 per cent of the distribution of most credit deals – albeit more for names that resonate in the region – Asian investors have often accounted for one-third or more of transactions priced in 2024 as well as providing price leadership and momentum in the execution process.

Again, there are reasons to suspect this bid will not be as strong forever as it is now. Relative value is a driver, as is a downturn in competing credit supply – specifically China-origin Reg S US dollar deal flow. Neither condition is guaranteed to linger in the long term, and a worst-case scenario would see Asian demand retreat as quickly as it emerged.

On the other hand, success tends to breed success in capital markets – and it is hard to see investors abandoning a market that offers issuance diversity, frequent new issuance and functional secondary trading. All these things can be promoted by the very act of increased new issuance.

There are already clear signs of a virtuous circle of issuance forming. Clifford Capital and PSP Capital separately referred to the success achieved by CPPIB Capital in the introduction of its Kangaroo programme as a leading reason for their engagement with the Australian dollar market. Last year saw a steady stream of debutant New Zealand corporate issuers, encouraged by the generally positive response to issuance by their peers.

There may be a limit to the flow of new issuers engaging with Australian dollar issuance in the near term, though, if for no other reason than that global core markets are also red hot at the start of 2024.

As an aside, it is at least curious that two years of ever-tighter monetary policy seem to have had almost no impact on capital market liquidity. Time will tell whether this is the impact of contrary fiscal policy or whether something else is afoot. For now, and as a general rule, borrowers continue not to struggle to find debt finance.

The steady stream of new issuance by existing and emergent borrowers is also having a positive impact on one of the Australian market’s traditional Achilles heels: secondary trading. While market participants have commented on the relatively cash-driven bid for many recent transactions, there is always switching activity around new deal flow. But traders report that a healthy level of market activity means there has yet to be significant pressure on inventory capacity, as bonds have typically been recycled without undue stress.

I am left with two main questions about market growth, or perhaps more accurately one two-part question. It is: can Australia separate itself as the genuine number three market in the world – clearly still on a smaller scale than the US dollar or euro option, but a step ahead of other noncore jurisdictions – and, if so, will this make a material difference to issuers?

Assuming for now that the first part is answered in the affirmative, I suspect the second answer is ‘it depends’. Domestic system growth clearly matters to the big-four banks, for instance: they have explained how issuing 40-50 per cent of their wholesale task at home would reshape their whole issuance strategy relative to times when 30 per cent might have been more realistic.

For global borrowers, the case is less clear. Take an SSA with a €50 billion (US$53.9 billion) funding task and which has come to assume Australian dollar issuance might account for roughly 5 per cent of the total in an average year. This is clearly not nothing, but it is also not a catastrophe if the Kangaroo option simply is not available even for a protracted period.

How far would the proportion of the total funding book have to grow for Australian dollars to become a truly strategic option? Even 10 per cent of this sort of funding task is more than A$8 billion annually – a fairly heroic aspiration for a single SSA name’s annual Kangaroo volume. But, perhaps, not inconceivable: KfW Bankengruppe sold A$6 billion of Kangaroo bonds in 2023 and the overall market has grown again this year.