ONG We see a very clear moderation in activity and price across the suite of housing indicators. It is no coincidence that some of these metrics are quite weak and they have turned down sharply in the last six months, as the RBA started its tightening cycle in May.

The RBA has set a very rapid pace, tightening from 0.1 per cent up to 2.85 per cent in just over six months. The likelihood of further hikes ahead persists. The most interest rate sensitive sectors of the economy and housing have started to slow in response to these hikes and expectations of further tightening. This is important, because housing is one of the key transmission mechanisms for the RBA – its rate hikes are designed to slow the economy, housing included.

We should not be surprised that the RBA moves are weakening several housing metrics and we expect this to continue over the course of the next 6-12 months. It is part of the necessary economic slowdown to bring inflation lower and eventually back within the RBA’s 2-3 per cent target range. But there is a question on overshoot. Housing is very rate sensitive and the question for all central banks is how far they want to move into demand destruction territory. It is a very fine balancing act between hiking enough to slow demand and the overall economy, and tipping into recession.

At this juncture, we believe the RBA and most central banks are right to be focused on taming inflation. The risk of sustained high inflation is far more damaging than the alternative, which is much weaker growth and, potentially, mild recession.

The RBA has focused on raising rates quickly to find an appropriate level, which is really challenging. Lots of factors are at play, including geopolitical risk and higher cost of living. But the flip side is that households have built up large savings they can draw on.

We take some comfort in the fact that – after some very rapid tightening, including four straight months of 50 basis point hikes between July and September – the RBA has stepped down its pace to 25 basis point moves. This is important because it signals the central bank is aware there are other risks to the economy, particularly on the activity side. It is not just about inflation.

It also implies we are probably getting closer to the terminal rate. This is an important message. The RBA is not alone – we see similar moves from other central banks, such as the Bank of Canada. The European Central Bank, Bank of England and Fed [US Federal Reserve] also look set to temper outsized hikes after very rapid tightening into neutral-to-slightly-restrictive territory. They are mindful of the lagged impact of rate hikes and the cumulative tightening already completed.

ONG In Australia, headline inflation is now 7.3 per cent – the highest in three decades. More importantly, some core inflation metrics are above 6 per cent. CPI continues to rise and we know from the leading indicators that it will move even higher. Australia is lagging on inflation and it is partly because our wage numbers have taken longer to pick up.

We are likely to see a further pick-up in services inflation given the global trend. Supply chain disruptions are starting to ease and goods inflation will come down, but Australian service sector inflation – which is only running at around 4.1 per cent – will pick up and keep upward pressure on inflation. It is challenging, but we are seeing early signs of moderation – including in the housing market.

Even so, the RBA should probably have hiked by 50 basis points in October. This would have given it more optionality. It was handed the opportunity on a silver platter to get more comfort on inflation, which is running too hot. It could then have stepped down later.

Getting the timing of these things right is always difficult, though. It is easy to say things like this in hindsight, but it does suggest we will need further hikes. The cash rate will certainly need to rise above 3 per cent.

HELLERUD In the RMBS [residential mortgage-backed securities] market, we are not seeing any deterioration in performance yet – arrears are at record lows. Deterioration will likely come, and I suspect this will be after the Christmas period early into the new year. Households seem in good shape right now.

ONG This is right – and it plays into the whole idea of the lag in monetary policy. It takes time, even in Australia. Variablerate mortgages take at least a couple of months from when the RBA makes a change to when it starts filtering through.

Secondly, we know lots of households have paid above their minimum repayments – there is a big buffer. A lot of households have not had to change their repayment behaviour yet and their disposable income has not shifted much. This changes the further rates go.

Thirdly, we know the fixed-rate mortgage dynamics of the last few years are starting to expire, particularly in the second half of 2023. We will see a big jump when borrowers need to refinance. It is a large, but slow, process.

Soft indicators – such as confidence, business surveys and house prices – react quickly to rate hikes. But the transmission through to the real economy – to household disposable income – takes much longer. This will be a significant story in 2023, when we foresee a material slowing in activity.

CHEN This is consistent with the story at Resimac. Our portfolio is resilient across prime and nonconforming loans, and payment buffers are still at all-time highs. But we are watching the lag effect closely. Historically, performance of the mortgage book is more closely correlated to the labour market than rates, but this is something we are watching.

ONG This is one of Australia’s huge advantages – unemployment will rise over the course of the next 12-18 months, but it will be from a multi-decade low. The labour market is extraordinarily tight and there are still significant pockets of skill shortages. While we will see deterioration, it comes from an an extremely strong starting point.

ONG We see a real divergence between the softer indicators that react quickly, such as consumer confidence, and what people are actually doing. Consumers are worried about costof- living pressures and they know it is not the right time to buy a major appliance. But what they say and how they feel versus what they are actually doing are two different things.

Retail sales growth is running at about 20 per cent year on year and total household consumption is at 6 per cent. These are very strong numbers that will likely hold up reasonably well into Christmas. Into 2023, we expect expenditure to begin to moderate – and more so as the year unfolds.

We get a lot of questions from clients on how Australia can avoid recession when most of the G7 is heading that way.

ZILELI We are also experiencing divergence between consumer sentiment and spending, and we are not recording any evidence of volume in our book going down. In fact, it has increased over the last few months.

Another relevant dynamic is prepayments, which are still quite elevated. Although we expect the level to ease over time, we are not yet seeing any sign of liquidity being soaked up by higher energy prices, inflation or interest rates. Our borrowers are still able to transact using their cards and pay them down. Equally, we are seeing lots of spending on credit cards in particular. From our perspective, central bank measures are not yet having any impact on consumer behaviour.

What will really have an impact, especially for issuers such as ourselves, is the increasing cost of funds. Issuers will need to grapple with this after becoming used to very low benchmark rates over the last couple of years.

TING Even if there is spread stability, assets will need to reprice to reflect cost-of-funding increases. One of the key challenges over the past few months has been the lag in repricing on the asset side and the consequences for excess spread and credit support. This flows through to our views on risk and, ultimately, where spreads should settle.

Many other factors are at play, not least of all the outlook for bank funding markets as programmes like the term funding facility and committed liquidity facility expire.

HELLERUD While investors do not seem too concerned about Australia’s economy or the credit quality of borrowers, price discovery and fair value in the context of this market volatility – most recently triggered by the UK and the spill over into global fixed income – is a major issue.

CHEN Nonbank RMBS spreads have been relatively stable over the course of this year. There is still good investor participation in the Asia-Pacific region – offshore investors are engaged and they do not perceive any issues with Australian product or credit. It is still a good story overall.

TING Some of the impacts from the most recent sell-off have eased with the stabilisation of the Gilt market and pause in the well-publicised selling by liability-driven investors. But, from a longer-term perspective, UK pension funds’ funding ratios appear to have have improved dramatically.

Will they still have appetite for some of the growth assets they have traditionally invested in? If not, how will their demand be replaced? These investors have been a material part of the market for some time.

ZILELI Equally, though, the UK selloff demonstrated the strong performance of Australian assets. A lot of them ended up on BWIC [bids wanted in competition] lists because, while investors were unable to sell at par, they were able to get a bid on them. It is ironic that the Australian names made it onto BWIC lists despite their good quality and liquidity relative to the other positions in investor books.

This bodes well for future allocations, because investors know they can buy our product and feel confident, in times of stress, that they can liquidate it at par or as close to par as possible.

TING It was great to see liquidity in the Australian securitisation market, with more than A$1.5 billion (US$1 billion) sold over two-and-a-half weeks. We have not observed these types of volumes since the global financial crisis, so it liquidity.

COOPER Investors have a range of opinions at the moment so it will be interesting to see where prices land once volatility subsides. When stability returns, investor confidence will increase and this will be positive for the market in the long term.

JOHNSON The deals that have executed over the last few weeks have been positive, particularly given the rocky period we have been in. It really speaks to the robustness of the product, the structures, the collateral and the Australian economy. Our securitised products are far stronger than they were pre-global financial crisis. There are a lot of positives.

HELLERUD It highlights just how critical a global and diverse investor base is because Australian domestic investors have a ceiling on how much they can absorb. This becomes very apparent during times of market dislocation.

CHEN Over the last year there has been a lot of joint lead manager [JLM] cornerstone support in public transactions, which we feel can be a risky strategy. It is a risk if issuers are heavily reliant on participation from banks, which have finite single-name limits.

It is important as an issuer to go out and make sure we are marketing the product and telling the story widely, so we are broadening our investor base. Whether or not offshore or domestic investors are participating, we will continue to engage with them and build relationships. Maintaining currency and jurisdictional diversity is essential to our funding strategy.

TING The market staying open during 2022’s volatility is a combination of its growing maturity and the diversity of the underlying investor base. But I think it is important to acknowledge the need for borrowers to issue. The private market can absorb only so much. Most warehouses are a means to an end; they are structured to be regularly termed out into the public markets.

JLM support is important in de-risking the warehouse-toterm process, but it is a double-edged sword. It helps facilitate transactions and gives issuers confidence to come to market. But at times one could argue that it does not aid price discovery and can potentially crowd out real-money investors that may have significant demand but at market levels.

HELLERUD If used in the right way, JLM support can be a helpful tool in the sense that it can ‘crowd in’ investors and aid the discovery process. But I absolutely agree that it can be a double-edged sword that can distort the market.

ZILELI The backstop is the benefit, but it should not be the basis of a transaction. It is a safety net if real money does not come in. This is how I see a JLM bid and, on this basis, it is good to have it there. As an issuer, however, I do not want to use it. I want many investors to come in. Frankly, the question in current market conditions is whether it is possible to bring a benchmark transaction without JLMs acting as a backstop.

This raises the question of what happens when JLMs run out of capacity. If this bid is being used consistently and warehouses are being drawn to the max, it will run out eventually. It will be interesting to see how long volatility persists for and then for how long issuers rely on the JLM support.

COOPER Successful issuers have spent the past few years building out interaction with investors, focusing on diversification and ensuring they have good relationships not just with domestic investors but offshore accounts as well. The issuers that have done this are the ones that have accessed the market successfully this year. This period has highlighted the importance of marketing and getting in front of investors.

SAKS The traditional bond market has become quite issuer specific. Most tier-one names are able to issue and trade in secondary but a lot of investors have sidelined or stepped back from some of the other names. The market has largely become name and tenor dependent.

The shorter end feels liquid but the belly of the curve and further out is essentially frozen. In the primary market, the bulk of interest is certainly in the shorter end of the curve. It is not immune to central bank uncertainty and volatility, but investors are much more comfortable playing in the shorter end.

Overall, it feels like the number of deals investors are willing to look at has narrowed in the traditional cash bond space. An ESG aspect tends to lend a helping hand: typically ESG paper can see a bit more liquidity in the secondary market and attract a wider range of investors for primary transactions. It does help, but this is not specific to times of stress.

Even so, some securitisation clients are receiving positive feedback. It sounds like mezzanine paper that is coming out in BWICs is trading well, which is interesting. Senior tranches are potentially their own worst enemy due to their size, but there are still very good levels on offer versus, say, major bank senior or covered paper.

TING Diversification has a lot of benefits but right now I would say a key focus for us is platform risk. Historically, investors have been almost entirely focused on collateral and structure, but we believe there is significant variance in the profitability and long-term sustainability of different platforms.

This is particularly important given the difficulty of accessing equity capital in current market conditions. Platforms need to be able to generate free cash flow to maintain scale and quality of servicing and underwriting, and they can no longer rely on equity markets to fund this.

JOHNSON The securitisation issuance profile is actually relatively consistent with prior years. RMBS remains the dominant asset class with 85 per cent of volume. ABS is always a smaller part though it continues to be well supported. Notwithstanding the recent disruption in the market, we have seen deals from first-time issuers such as Angle Asset Finace, with an equipment finance transaction, and Taurus has come to market as well. It was pleasing to see Zip Co do a deal recently, as consumer discretionary is a sector that has come under more scrutiny lately. I have not seen any major shift in trends and the fundamental dynamics remain pretty similar.

ESG is a tough one but mainly in the sense of finding supply. There is consistent issuance from hummgroup and Brighte, and everyone would love to see an electric vehicle (EV)-backed securitisation. But there are challenges, most significantly sourcing the assets. In Australia, political will has been lacking and we have not seen many incentives to boost the EV market. We need greater investment in charging infrastructure – but this will take time. We will wait and see what happens over the next few years.

CHEN We did our first social bond in 2022. We designed a front-end mortgage-lending affordability product to be able to demonstrate various social benefits to investors. It was a small tranche relative to the size of the deal but it signified our intention to do more in the ESG space. We also have aspirations to launch green products that we can use as collateral to issue ESG-linked bonds.

CHEN We did not in the end, but the transaction opened conversations with asset managers that have specific ESG funds and mandates. We were able to demonstrate that our social bond was linked to a product with genuine social benefits.

However, we also learned that there is more we can do on the corporate side to meet reporting expectations. This commentary was not just about the transaction itself but our corporate structure – how we are tracking and benchmarking against ourselves on ESG. At corporate level, we are enhancing our ESG programme and expect to deploy a best practice reporting regime in 2023.

The bond is linked to an affordability product, a high LVR [loan-to-value ratio] loan with enhanced underwriting and lenders’ mortgage insurance [LMI], that helps first-home buyers or borrowers in under-served communities with small deposits to purchase their own homes. We worked with Genworth to design the product. It allows borrowers to access the property market by financing some of the LMI premium.

TING On the ESG side, 2022 has been a record year for issuance with about A$1.2 billion issued from six programmes. We remain eager to see development of this market and are keen to engage with issuers that are exploring sustainabilitylinked issuance.

ZILELI When it comes to ESG, our focus is on the corporate side. We have launched a green lending product and the feedback from investors has focused on our corporate ESG strategy.

Investors want to see our approach to ESG targets and reporting, and make sure the two are in sync. We have established a working group and we are exploring including some of its outcomes in our annual report next year. Our ESG working group is setting the baseline for where we are – the next step will be issuing targets that can be measured and shared with investors.

This process will be different for every originator. For us, the environmental side is somewhat limited considering our business and portfolio. We will be more focused on social and governance, and we are keen to see how social bonds evolve.

I am on the ASF [Australian Securitisation Forum] ESG working group and we will be discussing social bonds, including whether the ASF should have a hand in developing a framework covering them. There will be more in this space in the coming year.

CHEN There is definitely more focus on social- and greenwashing. ASIC [the Australian Securities and Investments Commission] brought a case recently that demonstrates that paying lip service is not going to be sufficient. There need to be guidelines and genuine benefits from ESG finance.

TING One could argue that the nonbank lending market has been built on a foundation of financial inclusion. Most nonbank lenders are providing an alternative to bank products and have traditionally accessed a wider pool of borrowers by conducting more intensive underwriting and having greater risk appetite.

However, at deal level we use the lens of social impact across all transactions we look at, asking whether a lending product has a better, similar or worse credit risk profile as a result of the targeted borrower cohort. We want to understand the social element in terms of financial inclusion and responsible lending. This extends to assessing what risks have been mitigated and any structural protections. From there, we look at pricing.

In our view, the market will have reached maturity when we have products that achieve measurable financial inclusion without a material increase in credit risk or cost of debt. There is definitely appetite from investors for a product that can achieve this.

SAKS I would also like to make an observation from outside the securitised space. There is a big focus on ESG securities in the secondary market. There might not be a premium at the time of issue, but the same is not the case in secondary. There is a divergence. As this market develops more in securitisation, we could also see this play out.

Dealers know there will be a home for ESG securities because more funds are moving into ESG. There are more portfolios with targets that require a label, and dealers know they can find a home for this paper.

The intention behind these transactions, however, must be real. If someone buys a house with solar panels, does it count as an ESG loan if the panels were already there? There must be intention behind it, and issuers need to be driving change.

JOHNSON It seems like a great idea but it might be a little way off. Investor relations efforts nowadays include more information on the issuer and ESG at corporate level. This might not affect the assets, but the corporate level is important and at the forefront of the process. It is something we want to hear about as well, when we do our due diligence.

COOPER Environmental factors have been an established part of the market in other asset classes for a long period of time. It has really only been over the past two years that we have seen real growth in social and governance.

Investors nowadays are asking what each element means. They are looking at the issuer and its intentions, and asking what is happening at corporate level and how it is reported. The whole package is becoming more important.

Finance is harder to integrate with social. It is more difficult to standardise between organisations because everyone looks at it differently. It is often subjective, which is an issue investors are grappling with. Specifically, how do issuers create something that is standardised and reportable, and give investors trust in the objectives?

HELLERUD Absolutely gender diversity has improved. I’m not sure I would go so far as to say securitisation is more gender diverse than other parts of the market, but there are pockets within securitisation where there is very strong female representation.

We see this at the trustees, the rating agencies and the law firms. But issuers, intermediaries and investors still have work to do. I also believe that, regardless of which pocket someone works in, securitisation skills are highly transferable. For instance, moving from a law firm to an issuer is possible. This is really encouraging.

CHEN From an issuer’s perspective, a lot of people in the middle-to-back office are female. The front office is still male dominated. We need to encourage a transition from the middle office into the front office, which will improve gender diversity.

ZILELI We are not yet a diverse industry at senior level. When I go to offshore conferences, the Australian representatives are mostly male – there are so few females at those tables. But there are a lot of women in securitisation. I recently attended the ASF women in securitisation function in Melbourne and was impressed again at how much diversity there is. The challenge is moving women into leadership roles.

I came into securitisation in 2005. It was a smaller industry but it has grown significantly, in my view, due to the nonbanks. There were some women in leadership then but actually there has not been a quantum improvement since – we are not seeing anywhere near what I consider a desirable target of 40, 40, 20.

A lot of hands are needed to get a securitisation transaction off the ground – this is a much bigger industry than the senior-unsecured or covered-bond markets, factoring in the trustees, lawyers and rating agencies. As part of this, we come across more women that work in securitisation compared with the senior-unsecured space. But we need to promote diversity at the leadership level. The ASF is trying, but we have to ask what else we can do to support women taking the next step in representing their organisations rather than just hitting a ceiling.

ONG This challenge at senior level is not unique to securitisation. Whatever measures have worked in other parts of capital markets would be helpful in securitisation.

In my area, things have changed over the last decade and women are represented to some degree, but it is still disproportionately male at the very senior or chief economist level. Encouragingly, there is some wonderful talent in the pipeline – particularly in some of the larger organisations with bigger teams. They have made a conscious effort to do this.

COVID-19, a better work-life balance and the ability to work from home is helping. There is also a growing sense of camaraderie among female economists that has emerged over the last decade. I will quite often contact other women – if I can’t fill a speaking opportunity, for instance. They are my competitors and they are taking the spotlight but I will do it because it is about visibility.

SAKS We have to be intentional when it comes to this topic, and this ties back to the ESG issues we have already discussed. We must intentionally push for change, starting at the top, but we must also be conscious of this from the bottom up. It gives us confidence to speak out more and aim high: when one can see senior female leaders in the industry, it feels much more achievable to be able to get there one day.

TING Success begets success. If we see women in the industry, it encourages other women and aids the ability to develop the pipeline of talent. We have all been in the situation of being the only woman in the room, particularly at junior level. It can be uncomfortable. But I have seen this change positively over the past 10 years.

JOHNSON Being deliberate and intentional is important. I often hear that women simply did not apply for a job – but the question then needs to be: why? Was it the way the advertisement was worded? Was it the way it was posted? Sometimes people give up at the first step, but we have to work at it and it has to be deliberate and intentional to get a result. In our careers, if we gave up when faced with a problem we would not get anywhere. This is just another problem we need to keep working on.