A growing market in a troubled world

Two themes emerged most clearly from discussions at the KangaNews Debt Capital Market Summit 2025: the overall healthy state of Australia’s fixed-income market, and the increasingly turbulent world in which it operates. Taking place less than 24 hours before the latest big blow against global free trade taken by the US government, the Trump administration and its consequences were not far from every conversation.

“It is very difficult to understand what is happening, because interpreting the ultimate goal of the US administration is very challenging. Tariffs were announced for Canada, then held off, then re-implemented, with the purported aim of reducing fentanyl and illegal immigration coming across the border – yet less than 1 per cent of the fentanyl that comes into the US comes through the northern border, and not much more for immigrants. The US seems to be essentially trying to determine that trade operates by US rules, not by the global WTO.”

“Markets had taken comfort in the idea that cuts to the public sector and revenue raised from tariffs would go some way in tempering the fiscal trajectory. This is somewhat misplaced. The cuts do not save a significant amount and the overall expenditure on the federal public service in the US is fairly small. Likewise, the impact of tariffs and the revenue they raise is also questionable.”

“An OMO rate of 10 basis points over the cash rate target remains consistent with the board’s desired degree of monetary control. Under this higher OMO price, we expect the cash rate will trade within a reasonable range of the cash rate target. Accordingly, the cash rate, and other money market rates, will be consistent with the desired stance of monetary policy.”

“Banks can still come to OMO to acquire reserves to meet their payment needs and obtain ‘precautionary reserves’ for unexpected liquidity needs, or to lend to others. But the higher price will reduce banks’ incentives to obtain more reserves at OMO than necessary. A bank can make good use of private markets as a source of reserves if they face an unexpected need for funds.”
CHRISTOPHER KENT RESERVE BANK OF AUSTRALIA

“China has a pretty good record of hitting its growth targets and I have no doubt it will be able to meet a 5 per cent target for the next 12 months. But I think there is a more fundamental question here about whether we will get the dynamic China growth story coming back like it was in the 1990s and early 2000s. I just don’t see very many signs of that at all.”

“I can understand why stagflation concerns have risen, particularly when we’re talking here about significant tariffs and the flow-through impact on inflation. We have an increased risk of stagflation but it’s definitely not our expected outlook. At this stage, we would need the unemployment rate to be a full percentage point above what full employment might be and for inflation to be a full percentage point above the target core for a sustained period.”

“Over the past few weeks, with concern about tariffs and question marks about how the US economy is going to react, we have started to see a couple of cracks emerge in the market. In saying this, investors still have money on the sidelines, and they are still seeking yield. Even if we get a blowout in credit, higher yields could entice investors back.”

“We have been experiencing bouts of volatility over the last week or so and there is clearly more to come. Historically, the Australian dollar market has had a reputation of becoming illiquid and repricing wide of core markets rapidly under adverse conditions. The next test will be whether it can improve on this performance in the next phase.”

“The Australian dollar market feels twice the size it was five years ago, maybe even more. This has given us a lot more confidence that we can come back more frequently and in what we are going to be able to get out of it. We are quite excited about this. In particular, it feels like there’s a lot more acceptance of our bail-in paper, with much larger books supported by more Asian participation.”

“The way productivity in the health sector is measured – by looking at number of admissions, consultations or times a patient leaves the hospital within a certain amount of days – is not a great way of judging what a hospital actually does. We looked at quality-adjusted life years before and after treatments of certain diseases, like cancers and cardiovascular disease. On this basis, we got productivity growth on average of around 3 per cent year on in Australia over the decade we looked at – which is huge.”

“The affinity we hear from Australian investors for the Canadian SSA space, the Canadian pension space specifically, is based on a couple of factors. One is diversification: OMERS and other Maple 8 plans are coming to Australian dollars as new names that help investors fill out their books with something new and interesting. It helps that we are also very highly rated.”

“It is clear that Trump wants to dismantle the architecture that was erected after World War Two for prosperity, security, peace and stability in the world. He doesn’t even have a UN ambassador. He has already criticised the WTO and the WHO and, with the tariffs that will be announced tomorrow, he is sending flowers to the tombstone of GATT and the WTO.”

“The other thing about Trump’s tariffs is they are so chaotic. In a 24-hour period with Canada he can put the tariffs on and take them off again – for 30 days. Then they go on again at a different level. It’s micro tactics to the Nth degree and it is extremely chaotic. The thing is, business likes certainty. It wants to know what it is going to pay tomorrow based on what it is paying today.”
BRUCE WOLPE CENTRE FOR US STUDIES

“I was in Asia last week, traveling with our head of global strategy, and what really surprised me was the general underappreciation of the of the scale and the speed of change that Trump wants to bring about. It feels like we are in a period of deep structural change across a number of different areas – politics, economics and geostrategically. This is not business as usual.”

“The rise of the private banking sector is hard to ignore. Pre-COVID-19, this sector would account for perhaps 5 per cent of any new allocated tier-two transaction. This has increased to 30 and sometimes 40 per cent. The books themselves, meanwhile, have increased from an average or perhaps A$1.5 billion in 2018-19, such that last year alone featured nine tier-two transactions with book sizes of more than A$4 billion.”

“Including tier-two notes in the index would mean a change to its beta and carry, particularly of the FRN index as it is predominantly made up of senior bank paper. My understanding is that Bloomberg plans to retain the existing benchmark as an alternative and, for some investors, it may be more appropriate to keep using it. I’m sure quite a few investors would prefer to have tier-two as an off-benchmark, carry-enhancing trade.”

“Certainty is the key word in the bank outlook. We have certainty on what the capital changes are and when they are going to happen. The next level of certainty we need is how banks are going to react to these changes. We are interacting with them on this and we understand that capital management decisions are not taken overnight – they are long-term decisions and need to be well thought through.”

“Our investors contemplating redeploying proceeds from AT1s into ETFs really need to understand the underlying securities within these vehicles before being comfortable to proceed. Tier-two, for instance, is an instrument type that our client base is very familiar with – so it is a pretty natural transition for many of them to move out of AT1s and into subordinated debt ETFs.”

“A common theme from conversations with our clients over the past several years has been a strong demand for higher yielding, liquid and active solutions. What we were assessing and waiting for was whether liquidity in the tier-two market was able to stand the test of time. There has been a significant improvement here over the last 12-18 months, hence the timing of our subordinated debt active ETF launch.”

“The ETFs that have come to market recently have become more granular – for instance by offering access specifically to tier-two product. ETFs are also low cost in an environment in which investors are getting more cost conscious. We don’t anticipate the ETF train slowing any time soon, and particularly with the phase out of ASX hybrids.”

“The evolution in the duration of tier-two product means there is often now a natural buyer in offshore markets. Asian demand for the product, and indeed for Australian dollar credit as an asset class, appears structural as opposed to cyclical – and this is encouraging for liquidity.”

“A greater number of investors can now buy OTC product, including tier-two. Middle-market accounts and private banks are increasingly coming into tier-two deals, and now accounting for around 20 percent of our orderbooks.”

“There is a clearing price for most deals, at most points in time. However, there are periods where the capital markets can take a pause. Investors are typically quick to bake in and price in risks into their valuations. On the other side, though, issuers’ pricing expectations are typically stickier.”

“The measure for the domestic market is one of relevance – the extent to which quality corporates are factoring it in, and thinking about it as one of their first ports of call, when they have financing to do.”

“It is too early to draw any conclusions as to whether the last four weeks are going to extend into something more than a temporary setback for the local funding market. But our recent hybrid deal is a strong indicator of how the local market has developed. It is highly unlikely that two years ago we would have been able to price a transaction like this with the same type of market backdrop.”

“Our experience in our most recent hybrid deal, a month ago, was of strong leadership from Asian investors but also from domestic accounts. It was very pleasing get this type of leadership domestically. Elsewhere, there were new Asian investors in our book that hadn’t participated in our senior debt before. All this was quite important to us because we are trying to generate regular engagement with our Asian and domestic investors.”

“We don’t view the growth of Canadian issuers in Australia as a crowding-out effect. It’s great to have more issuers – it enriches the diversity and depth of the market. We haven’t experienced any sort of reduction in demand; to the contrary, we have had larger-sized transactions with greater breadth of investors.”

“Governance is a key driver of outcomes across all the states. We have seen a real strengthening in governance with some but a fundamental deterioration with others. When we talk about governance we mean budgeting, forecasting and projections – the accuracy of all of these and how they contribute to investor confidence in what might be a 10-year or longer bond investment. It is not just between now and the next election cycle.”

“Something that has come up in a lot of conversations we have had with clients over the last year is the idea that eventually some of the states could approach their funding tasks a bit more like the large Canadian provinces. This would mean diversification of something like 10-20 per cent of semi-government funding into offshore benchmark term issuance.”

“Rather than buy-and-hold investors owning large chunks of issues, which reduces liquidity in the secondary market, the Australian market will increasingly feature investors trading around for different purposes. It will depend on the metrics they are holding under, whether is on an asset swap or a G spread basis or, by account, whether they need financing or not, or whether they want to have Australian dollar exposure.”

“In his 2022 National Defense Strategy, President Biden suggested that the US is no longer structured for large-scale simultaneous wars with China and Russia, meaning the US was no longer capable of winning two wars at once. I think this was the moment where the four countries that have become known to us as the ‘axis of alignment’ – China, Russia, North Korea and Iran – started to realise that, if they coordinated their activities, they could start to pressure this unipolar global superpower.”

“If, instead of circumnavigating Australia, next time the Chinese navy sits up in the water off Singapore and blockades our fuel deliveries, Australia – which has 14 days of stored liquid fuel in the country – would very quickly have to concede. Disrupting fuel delivery out of Singapore for as little as seven days would cause major changes to our lifestyle.”
MAJOR GENERAL GUS MCLACHLAN