Domestic and international demand outperformance

Australian sovereign and semi-government funders report robust demand for their issuance from key domestic and international investor sectors – including at least one about which there was considerable concern until recently.

DAVISON A year ago, Japanese asset repatriation and what it might mean for the Australian market was a major topic of conversation. This has not been an issue, though it is worth noting that Japanese policy normalisation also has not happened at the pace some might have anticipated. The Australian Office of Financial Management (AOFM) recently hosted its investor event in Tokyo: is it still a concern that policy normalisation could happen and that this could have a negative impact on demand for Australian dollar bonds?

WHEADON Japanese investors have been net accumulators of Australian bonds for decades. There have of course been periods in which yen weakness or less attractive hedged or unhedged yields have triggered times of net selling from Japanese investors. But the trend has been up for a long time.

Japanese Ministry of Finance (MoF) data indicate that Japanese investors were net buyers of government and semi-government bonds through March and April after a year or more of net outflows. Our own secondary market turnover data tell a similar story, although cumulative ACGB [Australian Commonwealth government bond] flows were broadly flat looking back over the 12 months to March 2023. This suggests that selling has been more focused on semi-government bonds.  

Should we see BoJ [Bank of Japan] policy normalisation, there will likely be a period of volatility and possibly some Australian dollar divestment. We should remember, though, that there are many Japanese investors with good reasons for being in Australian bonds, including some with Australian dollar denominated liabilities to manage. I suspect there would be a period of volatility but we would move past it.

Our Tokyo forum was very successful, with about 100 different investors attending. We surveyed them, as we usually do, and this revealed that about three-quarters own ACGBs and more than half own semi-government bonds. These numbers are very similar to the results from our last forum, which was pre-pandemic.

There is always risk – volatility and uncertainty is business as usual these days. However, a large structural change in Japanese holdings of ACGBs is not in our baseline. I think they will continue to be one of our largest and most important investor cohorts.

KELLY I agree that things would be uncertain for a while if the BoJ ever moves on its yield-curve control policy. But I don’t view this as an immediate risk. No doubt it will be something we will have to deal with at some stage, but I don’t see it as a major disruption.

MCCOLOUGH  At the AOFM Tokyo forum, one message from Japanese investors was that non-Japanese people are impatient for the BoJ to shift its policy – whereas they see it as something much further down the track.

Asking directly if there was a yield level JGBs [Japanese government bonds] could realistically get to where there is a regime change and any chance of reversing three decades of investment was almost laughable.

BLUNT Any selling from Japan over the past 12 months has been pretty orderly. As mentioned, over the past three months the MoF data we have seen show net buying. Is this reversal in the price?

MCCOLOUGH Positive inflows are expected so, to that extent, yes, I think it is in the price. Even if it is true that Japanese investors have been divesting at the margin, for one of the most important global investor segments I would say the market has seen pretty good performance – especially considering the scale of supply.

It will be interesting to see how Japanese investors respond when conditions get more conducive for them. At the moment, hedging costs look bad. But everything looks negative from a Japanese perspective and Australia is still, relatively, one of the better options. There are investors with insurance mandates and a need to diversify, and their behaviour tells us there is a core bid.


There is always risk – volatility and uncertainty is business as usual these days. However, a large structural change in Japanese holdings of ACGBs is not in our baseline. I think they will continue to be one of our largest and most important investor cohorts.


DAVISON What has issuers’ domestic demand experience been recently, both from balance sheets and real money? Is there evidence of a reallocation into fixed income on the back of higher rates?

KNEEN The domestic market has been very supportive of semis, which may be due to yield pickup or spread. We have had good demand from real money and balance sheets in our syndicated transactions, and we also attracted good investor bids in our tenders throughout the year – we can discern what’s coming in from the trading books and from investors.

We have also noticed development in how these investors are interacting – either accumulating or switching along the curves. With both real money and balance sheet being active, we have been getting good two-way flow among a diverse group of domestic investors.

ZUVICH Our most recent example is the green bond. Although the instrument may not necessarily appeal to all real-money accounts, we were pleased with the bids and bid sizes we attracted from the sector.

DAVISON The asset allocation story being told domestically is about super funds increasing their weighting to fixed income. Are these flows visible in the market?

BLUNT Definitely, although there are competing asset classes. For example, there has been a lot of a global SSA [supranational, sovereign and agency] issuance in the shorter end, which typically appeal to real-money investors.

But super is here to stay. AustralianSuper, for example, has just released its latest numbers and the allocation to fixed income is getting higher. It is a slow burn in the market, though. Domestic bank balance sheets have obviously been very prominent in primary transactions, but super is one of the sectors that will provide continuing support.

DAVISON For balance sheet investors, one technical factor is the potential for term funding facility (TFF) maturities to reduce exchange settlement balances, with a corresponding flow into ACGBs. Is the AOFM seeing this or expecting it?

WHEADON With balance sheets generally holding excess HQLAs [high-quality liquid assets], I don’t think TFF maturities necessarily translate into an immediate bid for ACGBs. In any case, with ACGBs trading expensively to the three- and 10-year futures contracts, semi-government bonds will likely be the main beneficiary. This is also where more supply will be available.

In the longer term, though – and with balance sheets only holding about 10 per cent of ACGBs on issue, having been as high as 25 per cent in the past – there is definitely room for growth here.