Foundations for the future

The KangaNews Debt Capital Market Summit 2024 took place in Sydney on 18 March amid an unprecedented bonanza of new issuance and at what could prove to be an inflection point for the local market. The agenda covered a raft of topics centred on the theme of taking advantage of recent growth to deliver a market that is match fit for the demands that will be placed on it, with discussions ranging from the impact of geopolitics and global economic currents to the need to stay ahead of accelerating technological advances.

“There is no possibility that, in a war over Taiwan, Australia would not be involved. Australia has never not been in a US inspired military action since the First World War. People who think we can stand on the sidelines of a conflagration over Taiwan are kidding themselves.”

“Most Australians completely misunderstand our relationship with the US. No other country is taken as seriously in Washington as Australia. If there was a war in the Indo-Pacific, Australia would be reliant on the US for our existence. It is as simple as that.”
CHRISTOPHER PYNE

“The first two years of Trump’s first term were a story of tax cuts and deregulation, but protectionist Trump is a risk now. This would mean a 10 per cent across-the-board tariff along with real concerns about the deficit – but without the tax-rate boost to equity markets.”
CHRIS KRUEGER TD COWEN WASHINGTON RESEARCH GROUP

“Clearly the Australian market is very strong and this is contributing to less issuance into the US by the Australian majors. As a result, our New Zealand subsidiaries are benefiting by attracting greater demand for their US dollar issuance. In our recent US dollar trade, Westpac New Zealand attracted investor demand of more than US$6 billion – much more than normal.”

“The year started with most analysts deciding between a hard or a soft landing, but it was only a month into 2024 that I first heard the term ‘no landing’. It is becoming more common for investors to say they are not concerned about whether the landing is hard or soft – it’s just that we are now on a glide path.”

“We raised more than US$10 billion equivalent, or about 20 per cent of our annual issuance volume, in the first week of 2024. It’s clear that there is continued interest, globally, for highgrade fixed income and for organisations, like World Bank, that are focused on positive development impact.”

“Asian investors are seeking alternatives and they have raced into the Australian market in a significant way. There is also the natural bid from super funds for Australian assets to meet benchmarks. The two will significantly drive demand for local fixed-income assets.”

“If the issuer name is well known to the market and it has issued with a yield of more than 6 per cent, liquidity is likely to be relatively good at the moment – even if the tenor is a bit longer. But these things can change quickly, and liquidity on longer-dated deals really depends on views on rates.”

“Several key global macro themes are important for policymakers and markets, and translate through to Australia. Globally, central bankers seem more comfortable that inflation is closer to their targets. But rather than a linear move it has been a bit of a bumpy ride – as we have seen in some recent data prints.”

“I am more concerned about inflationary demand pressures in the US. There is full employment, relatively high inflation, much stronger growth than some peer economies and a deficit of 6 per cent of GDP. It is pretty easy to grow when there is this level of stimulus. It is no wonder the US has had a few upside inflation surprises.”

“One key change has been the broad-based acknowledgement that fixed income is, once more, an entirely investable product. What we’re seeing in our market now, particularly with offshore accounts, is a desire to invest on absolute return basis.”

“Our economic growth forecast is very weak. The consumer is very soft, and the annual growth rate for the CommBank household spending insights in nominal dollars is 3.5 per cent: in real terms it is deeply negative and I think it’s going to get worse. However, there could be some circuit-breakers by the second half of the year – in the form of tax cuts in July and the first rate cut in September.”

“Inflation is heading in the right direction but not in a way that suggests central banks have overcooked it. A mid-cycle slowdown is a fantastic outcome and means we won’t get correlated rates moves across different markets.”

“A straight translation of lower growth into inflation reaching target is unlikely. There have been recessions in Europe and the UK, but these have not helped get on top of inflation. What it really comes down to is the labour market.”

“Liquidity demands on our funds vary across mandates but in general we need to be able to exit positions quickly. In a tricky cycle it might take a couple of weeks and anything above A$50 million would give me pause. But it is much simpler in the current market.”

“It’s been a very good period for SSAs in Australian dollars. We have seen a clear shift and a pickup in participation by offshore investors, with the secondary market responding very well. Bidoffer spreads for SSAs are tight and price takers are benefiting.”

“This quarter has been remarkable for duration in corporate credit: the majority of issuance has been at seven years or longer. It wasn’t that long ago we were talking about a five-year sweet spot and hoping it would extend to seven.”

“Liquidity in semis has arguably never been better. Last year, secondary market turnover in TCorp benchmark bonds as reported by our panel banks was a record A$174 billion. This year we are already at A$160 billion and on track for A$220-230 billion by the end of the financial year, in June. This speaks to tighter bid-offer spreads and greater market depth, which increases our ability to issue in volume efficiently.”

“Offshore investors facilitate increased liquidity in the Australian market. They often bring a different point of view from local investors and this can change the direction of trading of various asset classes.”

“The international investor base is driven by a diverse set of investment decisions and it provides market makers a level of comfort that they can trade in larger volume with less impact. There have been numerous periods over the last few years where we have traded more secondary volume with offshore balance sheets than with domestic accounts.”

“Thinking about what could turn the tide on the record level of inflows into fixed income – it could be higher inflation leading to a higher-for-longer rates environment or idiosyncratic risks that we haven’t thought of. But these are all things that feel manageable within what feels like a very strong market.”

“We are observing a slight increase in allocation of capital from Asian accounts toward Australia – but it only takes a few points to move the needle for our market. Execution dynamics are very different when we start in the Asian time zone and have A$3-4 billion in the book by the time New York opens.”

“Covered bonds are a useful funding tool to support balance sheets, being available across multiple currencies. We have recently witnessed a more traditional use of covered bonds, particularly in Europe. This likely demonstrates that we are back to business as usual instead of euro senior being expensive and covereds being the only economical way to access euro funding.”

“Over the first quarter of the financial year the major banks have been busy in the US dollar market, across senior and tier-two. Peak book sizes have been huge: we haven’t seen breadth of investor demand like this for US dollar investment-grade transactions in many years.”

“Funding the critical needs of our society is often beyond the lifespan of governments so it is hardly surprising the A$3.7 trillion in superannuation savings has become the focus of the enormous task of transitioning our energy sector and alleviating the housing crisis.”

“Our borrowing programme feeds into the active portfolio and goes into credits like infrastructure and real estate, which have a very high fixed-income factor loading. We can therefore maintain a market risk appetite of 85 per cent growth and 15 per cent defensive assets while also having a much more diversified portfolio.”

“We have been spending a lot of time thinking about how we assess cyber risk in our credit assessments, in the same way we would assess any other risk. We expect to ask customers what their cyber practices are, to have an organised and tested cyber security framework, and a tangible plan to address incidents which is tested on a regular basis.”

“Australian retirement savings are atypical. Australian investors have a very high weighting to growth assets and modest diversification outside unhedged foreign exchange. This contrasts with other retirement systems, which are more balanced. In Canada and the UK, for instance, the level of interest-rate duration at scheme level is 9.6 and 13.6 years, respectively.”

“In the last year, markets in Asia faced the challenges of high global interest rates, credit issues in the mainland real-estate sector and geopolitical tension. As a result, there has been a decline in overall mainland international bond issuance, though we have seen an increase in issuance of bonds denominated in RMB in Hong Kong as well as of green bonds. Asian investors and issuers clearly continue to look favourably on the debt market in Australia.”

“We are moving from the internet economy to the token economy, which will allow technology to transform the lifecycle of transactions. This means data and value can move simultaneously while clearing and settlement is on a single market infrastructure. We will be talking about T plus minutes, not T plus days.”

“The systemic risk element in our banking system is well worth highlighting. If any of the majors is attacked, it could have a significant impact on the system. The banks are exposed to each other, they have significant direct exposures to payment systems and there are also common third-party service providers.”

“In 2021, Germany enacted legislation to allow electronic and blockchain-based securities to be issued, which allowed that market to leapfrog dematerialisation directly into native digital issuance using Deutsche Börse’s digital post-trade platform. I expect this type of digitisation will only continue, adding to the US$4-5 trillion of tokenised digital securities that could be issued by 2030.”

“According to World Bank, distributed ledger technology and central bank digital currencies could significantly improve access to finance for its member countries and bring the bond market squarely into the 21st century. Whether this makes it a bad time for Australia to fall behind is for the future to judge.”

“Instead of just being in a ledger, securities will modify over time based on updated data via a trusted oracle. For example, sustainability-linked bonds could have coupons or other features modified based on the most up-to-date information.”