NOTE: One investor asked to appear on an anonymous basis and their comments are attributed to “fund manager”.

FUND MANAGER Our customers invest in yen. The hedge and basis swap costs are very expensive for allocations to the US at the moment. If there is a requirement from clients for a high-rated, triple-A investment that also offers increased return after hedging, we have to look at Australian dollar investments – these are a straightforward choice compared with other currencies.

On the other hand, if a customer in our global funds requires unhedged global investments, we look at liquidity and cash rates. Australia is small in a global sense so it can be difficult to establish and manage an active position.

TOKUDA Because we don’t hedge, when we compare Australian dollars with other currencies it is easier to invest and relatively attractive. US trade policy is uncertain, which makes it difficult to take risk in the US at the moment. When it comes to monetary policy, moderate interest rate cutting is starting in Australia and an interest rate hike is unlikely to happen.

We do not think the Australian dollar-yen exchange rate will drop soon or suddenly, either. Therefore, the Australian dollar is quite attractive.

TOKUDA Yes. Our basic investment strategy is that yen appreciation has damaged foreign-currency investments – including but not only Australian dollars. We mainly do hedging, but we have hedged and unhedged investments to distribute risks.

TOKUDA The Australian dollar-yen exchange rate is at a high level and while I think it is unlikely to go down dramatically I do not have strong conviction. Overall, my base case is that the Australian dollar will not appreciate further but it is also not likely to go down significantly from where it is today.

ANDO There is also Australian dollar-US dollar to consider. Since November, the Australian dollar has dropped to US$0.60. This is because the US Federal Reserve was too late to cut rates. At the same time, Australian macroeconomic conditions temporarily seemed weaker so there is a divergence of monetary policy between the two countries. More recently, a negative view on tariffs has now been incorporated – which is why the US dollar is going down.

I think the biggest uncertainty is the impact on and from China. But we have some indication on how this will go from the experience gleaned from the first Trump administration – in which there was a drop of 15 per cent for the Australian dollar. There is also now tariff headline risk.

However, to a certain extent, the market had already taken into consideration, before the election, that Trump would win. I think there was already an adequate correction. During the first Trump administration there was a trade war – but it came as a surprise. This time it has already been taken into consideration and there is no more negative material to come out. At US$0.60, the Australian dollar is not likely to go down any further. Right now it is US$0.63, but from there there is not so much down side.

On the other hand, we are investing in yen. If inflation goes down moderately in the US, if the Fed takes a moderate stance, US dollar-yen won’t go down so much. This is unpredictable, though we don’t view the risk as too great. At the same time, if there is any external shock, the Australian dollar might go down versus the yen. We believe we can maintain an open, unhedged stance in FX.

KIM The US dollar has been appreciating while the Australian dollar is depreciating. These must be considered separately. It looks like the Australian dollar has come to the lower limit based on the trade-weighted index; based on inflation and financial policy in Australia, I don’t think we have to be worried too much about depreciation of the Australian dollar. Against this backdrop, the Australian dollar is doing pretty well.

The other point is China. In fact, Australia’s sensitivity to China has come down quite a bit. After the pandemic, China imposed tariffs on some Australian products but it then withdrew from this as it wasn’t able to bear it. In other words, Australia can bear less demand from China – which means China’s influence on the Australian economy has come down.

China’s economy weakening and the Australian dollar coming down – I don’t think there is a validity to this scenario. As a result, I think the Australian dollar will be robust.

KOBAYASHI Yes, especially because there is uncertainty about the policy stance in the US. The Australian situation looks better. Another positive factor is that Australia is also finally cutting rates.

KOBAYASHI With regard to the macroeconomy, it is increasingly difficult to predict the future since the pandemic. There is, for instance, no clear-cut trend in the fixed-income market – and this was the same throughout last year: it was a ‘trendless’ market. Short-term macro developments drove rallies, in a phenomenon that was repeated many times.

Since the huge rate cuts in the US last year and the presidential election, the concern has flipped to the potential for a return to hiking due to inflation. Right now, we are again trying to interpret what is real and fundamental.

Prior to the US election, the market tried to hedge against the scenario in which interest rates would have to go up, even while the Fed had an outlook for a delayed interest rate cut. My view now is that we will come back to where we were, in the sense of lower rates being the base case.

But if this doesn’t happen – if there is further concern about inflation and interest rate increases, or if the rate cutting stops – perhaps the US dollar will increase. On the other hand, if there is over-hedging the US dollar might depreciate in the short term.

KOBAYASHI We are not betting on any particular scenario. But I don’t think the current administration is hoping for inflation to return if the tariffs come about. In other words, they don’t want to see the inflationary environment prolonged. For investors, this increases demand for fixed income.

SAKON Since Trump came into office and the noise around tariffs increased, the market has been fluctuating dramatically. Looking at Australia specifically within the macro environment, the Australian economy – and therefore interest rates – is greatly influenced by the US situation.

I agree that the Trump administration would like to contain inflation. But the US economy itself is quite strong. We are continuing to be watchful concerning how far tariff policy will be executed. Our expectation is that interest rates will come down moderately, but we are not sure how far – due to the tariff situation.

FUND MANAGER A key factor for us is that there has been high immigration in Australia, which means the population is continuing to grow. This is the strongest point for the Australian economy, so whether or not immigration continues is something we are watching.

Regarding industry, Australia’s import and export profile shows there is not so much trade dependency and, as a result, the impact of the global trade war is limited – except for the impact on commodities.

In the bond market, overall, Asia is wide of US credit and Australia is wide within Asia. In RMBS [residential mortgage-backed securities], for example, globally speaking spreads in Australia are 40-50 basis points wide. Spreads in Australia are very wide in general when compared to US Treasuries. Maybe the demand-supply situation we have discussed will result in Australian spreads reaching the global standard.

This said, issuers’ motivation is not to focus on particular investors because, even if doing so means spread goes down, they cannot assume they can get the same funding from investors forever. As a result, issuers have to diversify their investor bases. Given this, the situation is not likely to change much from where we are today.

SAKON I agree that population growth and immigration are the key factors for the Australian economy. Even if consumption per person goes down, this is compensated by volume and population growth. Meanwhile, consumption is likely to recover – which means I have a positive view on Australia.

Having said this, I am a little concerned about the upcoming federal election. I will be watching the policy of the new government – for example, inflation concerns might be rekindled depending on whether or not it wants to spend a lot.

UEDA Immigration is one factor and it is also worth mentioning that the labour market in Australia is quite robust. This means interest rate cuts should work rather well. Frankly, I don’t have any big worries about Australia.

ANDO With respect to the Australian economy, I have seen some weaknesses in recent months. However, I think this is just cyclical so there is not a lot of concern.

Over the long term, there is stable economic growth with good political stability. From a long-term perspective, Australia is a pretty good country to invest in. This also means that when there is instability in the global market, investors can use Australia in a positive way. From this perspective as well, then, I have a positive view of the country.

KOBAYASHI If we look at it from a global bond market perspective – whether the Australian bond market outperforms or underperforms – rather than saying Australia is a safe haven I would say uncertainty is receding and central banks of certain countries are aiming at normalisation policies. In this respect, relative yield is high in Australia while, from a macroeconomic perspective, there are things like fiscal consequences from significant defence spending in western Europe. In view of this, we have less concern about Australia.

TOKUDA I don’t have much concern about Australia. The only tail risk I can think of is that there might be a sudden deterioration of consumption. If this happens, because of internal factors in Australia things might go in a bad direction. This is a possibility – but it’s just a tail risk, so basically I see no problems and I would consider Australia to be a safe haven.

KIM I agree with my colleagues – over the mid-to-long term the migration and resources stories are positive and the economy, compared with other advanced countries, can maintain a higher potential growth rate. I view Australia positively in this sense.

This year, from a short-term viewpoint, inflation is likely to go down and consumption should recover rather than deteriorate.

One thing I would add is that, for a bond investor considering risks, current RBA [Reserve Bank of Australia] communication has room to be improved. Sometimes its communication heightens volatility somewhat. This is a risk, but it is also an opportunity.

ANDO Because I’m responsible for foreign fixed assets, I don’t watch the Japanese macroeconomic situation very closely. But when I talk with my colleagues it seems that the expectation is for demand-led economic growth in Japan, which will lead to higher wages and inflation. This is the structure the government is trying to achieve, although we are not there yet.

After the COVID-19 pandemic, there was global inflation and the cost push started to penetrate into the Japanese economy. This is why prices are increasing at the moment. There has been some increase in wages already, but inflation is still higher than wage rises.

This is why the BoJ is moderating after long-term QE and trying to move into the territory of interest rate hikes – but not, as is the case with foreign central banks, to contain demand. What this means is that, considering potential economic growth in Japan as well as the pace of rate hikes and the terminal rate, sooner or later we will reach the limit.

ANDO To be honest, it is very much influenced by the global economic situation. If global economic trends stay stable, we think the BoJ can increase rates up to 1 per cent.

AIBA When it comes to Australian dollar-denominated savings, many of our customers are looking for a capital gain. This means yen depreciation is a tailwind for them. However, the momentum is not so strong because there is limited ‘natural’ demand for Australian dollars compared with the US dollar.

Our customers compare foreign currencies. In this sense, as the yen is appreciating, the US dollar becomes more attractive. As a result, US dollar savings are growing more than Australian dollar savings.

FUND MANAGER Regarding the repatriation of Japanese funds, several factors are in play. First is the yen interest rate outlook. Many thought there would be further interest rate hiking but this is not happening to the extent they expected. Other currencies, paricularly US dollars, continue to have higher interest rates.

There are other factors. I have had conversations with people in our business who are in charge of other markets, and what they say is that US dollar yield has risen in the past year, which means our clients have less appetite for fixed-rate products. This has resulted in some selling of foreign-currency-denominated fixed income. Even though there might be some attraction in foreign-currency-denominated bonds, there is not a high motivation to invest. This is the environment we are in.

Unless something happens – such that we are more certain about the direction of interest rate movements or the cost of hedging drops – institutional investors will not find it very easy to go back to foreign-currency markets including Australian dollars. On the other hand, irrespective of this, investors that have deposits in foreign currencies have to make continued investments.

KIM Retail clients are changing, too. Senior generations tend to buy mutual funds at spot and have less appetite to have positions in foreign currencies. But recently we have also experienced some developments with the younger generation, which has started using NISAs [Nippon individual savings accounts]: tax-exempt government investment accounts for anyone over the age of 18.

These investors are trying to make money based on what they have seen in their lifetime, and their first experience has been yen depreciation. As a result, they have had success with investment in foreign assets. I don’t think they will change their strategy of regular buying of foreign assets and it is possible the Australian dollar will benefit from these new investors.

KIM Yes, but this will take time. These investors have experienced increases in stock prices, which is a success story. But they have just experienced one cycle – a strong market – so they need to start to think about the importance of asset allocation. This means they will need to put money into fixed income – but it is not happening at the moment.

UEDA We had been investing in SSAs but the widening of semi-governments has resulted in a shift more to semis. We have heard the talk of possible downgrades in this sector, but even after downgrades we would be able to continue to invest in Australian semi-government bonds as they are still within the double-A space. QTC [Queensland Treasury Corporation] and TCV [Treasury Corporation of Victoria] will continue to be our focus.

TOKUDA We believe super-long liquidity has improved this year. My understanding is that Japanese investors used to be the only significant buyers at the super long end and there was therefore not much liquidity. However, there is now more liquidity at the long end due to increased demand out of Asia and Europe over the last year. This has increased the attractiveness of semis.

When we compare semis and the sovereign, there is not much reason to invest in ACGBs. Even though there has been talk of problems at QTC, for example, we don’t think there is heightened risk in the semi sector. Semis also offer more spread than SSAs. This, along with improving liquidity at the long end, makes semi-government bonds attractive.

FUND MANAGER The semi-governments come to Tokyo to do investor relations work and they also offer conference calls. They are very proactive and they provide us with information on a daily basis.

As a result, even if the recent news about QTC’s potential downgrade resulted in a price shock, it would not be felt too strongly – because investors can hold these bonds with peace of mind. This is particularly true for Japanese investors, because the issuers visit us quite regularly.

SAKON In the five-year and 10-year zones, it is the SSAs and semis that are abundant and where liquidity is quite high. We therefore favour SSAs and semis in these maturities. When it comes to the 15-year zone, there is not much on offer from semis – although if there are bonds from these issuers we prefer to invest in them. Due to the lack of activity from semi-governments in these long maturities, the sovereign could be a good investment.

In terms of liquidity, as Tokuda-san has said, super long liquidity is getting better. If there is more in this zone from the semis we will invest in them – if they are good names.

SAKON We have not invested in the Kangaroo bonds from Canadian issuers. Having said this, it should be noted that the yield is not inferior to the semis. Yield is our focus, so we are investing in PPs [private placements] at the moment.

KOBAYASHI We are not buying much in the SSA sector at the moment. We did invest in them in the past, for yield. In the case of semis, relatively speaking we wanted to distribute investments among the different issuers. Yield and diversification are the two reasons we invested in SSAs.

KIM It is true that liquidity has increased with the big three semis, and it has also increased with some of the smaller Australian state government issuers. For example, late last year or early this year we bought Tascorp [Tasmanian Public Finance Corporation] in the secondary market with limited transaction costs. In the past, it was hard to buy this name in the secondary market.

This is very positive change and the background to it is that the RBA’s presence in the market has fallen and foreign investors are coming into the market.

For the mutual fund scheme, this is a critical improvement – our clients have the right to withdraw money at any time, which means we need to be able to sell bonds when this happens. This improvement in liquidity means we can now buy semis more proactively and I hope this liquidity situation continues.

KIM Not at all, because these investors make market adjustments to fair value. I believe in the past the price of semi-government bonds was sometimes a little off fair value. From this point of view, new investors are welcome as they enhance liquidity and bring good price adjustments to the market.

TOKUDA I also think the more market participants there are, the better. Securities firms I talk to say pricing is getting better due to the larger number of players – especially on the bid side. This has been the case for the last 12 months and it has resulted in more investors – such as hedge funds and other global players – coming into this space. This has been very positive development for the semi-government market over the past year in particular.

SAKURAI Issuance growth certainly contributes to liquidity. As such, we welcome the market growth. On the other hand, with market growth more investors come in and this might lead to a mismatch between demand and supply – which could lead to spread tightening. We don’t want to see too much tightening because it makes it difficult for investors that are already allocated to continue to invest. There are pros and cons to the market growth story.

AIBA We invest mainly in bank RMBS. However, we are also interested in investment opportunities in nonbank prime RMBS and auto ABS [asset-backed securities]. The variety of collateral on offer is expanding, especially from nonbanks. However, each issuer has very different portfolio characteristics, which means we have to look closely at each name, one by one.

We believe there is good relative value in prime nonbank securities compared with bank RMBS, so we are interested in these. However, we don’t go all the way to nonconforming loans. We look at SMSF [self-managed super fund] lenders and nonbank lenders that are closer to prime.

KATAHIRA Last year there was record issuance and good absorption by investors, with good demand. Japanese investors played a role here. In this sense, the growth has been positive because of the good access to the market and the sense of comfort and increased liquidity.

When it comes to liquidity, we are basically hold-to-maturity investors and don’t have any concern under normal market conditions. But when it comes to periods of market stress, we have not had the chance to verify whether there will be adequate liquidity. We will continue to monitor the market.

ADI [authorised deposit-taking institution] prime RMBS has been our main investment so far. But we now expect to look at prime nonbank issuance because these issuers are the drivers of market growth. We want to select the good names in the nonbank sector. As for auto ABS, we will continue to watch this sector because we can take benefit from short duration and wider spread.

KATAHIRA In the beginning, there was some concern about the shift from banks to nonbanks. But if we can verify a track record such as purchasing assets sold by other companies, though it depends on their performance, we are happy to consider it. We are comfortable with captive issuers. We are neutral with regard to nonbanks.

KATAHIRA I was referring to selling in the secondary market. Having said this, we prefer short duration – so liquidity is not a big concern for us in the current situation.

AIBA Many recent transactions have been oversubscribed. Especially for securitisation, there is a seasonality to issuance – for example, it is heavily skewed toward months like June and November. This is fine but, when there is a slack period after these busy months, there tend to be oversubscriptions because the asset class has a lot of prepayment – so unless an investor can continue to invest, it’s hard to maintain the balance.

To some extent, without sufficient allocation we can’t maintain our Australian dollar portfolio. Of course we still want the diversification this market offers, but from our perspective it would be good to see a better balanced issuance timetable. If this were the case, we would be able to place larger orders.

SAKURAI Huge allocation cutbacks do happen – but it differs from one originator to another. We tend to raise our hand early in deal execution, and when we are given half the amount we have indicated we tend to have less appetite for these originators. We prefer originators that give us our expected allocation.

KATAHIRA In our case, to be efficient we would like to invest a minimum amount if the spread level is enough. In this sense, cutting back on allocations makes it difficult for us. As Aiba-san has said, we have seen more and more issuance in the Australian securitisation market so if the timing of transactions was more balanced we would have the resources to work on more deals.

SAKON I wouldn’t like to name names, but when it comes to the Australian dollar securitisation market there is the ability to negotiate on spread. Having said this, of late, some big Japanese investors have been looking for new investments and have been putting a lot of investment into the Australian market – which means they are asking for big allocations even if spreads are tight. This in turn can cause spread tightening beyond fair value, and this is a concern.

SAKURAI We don’t have any major concerns about performance at the moment. It is true that it is a competitive market but APRA [the Australian Prudential Regulation Authority] is applying very strict criteria for evaluation. As a result, even if there is a shock in future, there won’t be a significant difference in performance within prime collateral.

Second, as I mentioned earlier, Australia has a lot of immigration and shortage of housing is a problem. This is not new – it has been the case for some time. As long as the country has an open immigration policy, I can’t imagine a significant drop in house prices. If we have the collateral, we can get recovery from the houses. This also means we are not very concerned about RMBS collateral.

AIDA I agree with Sakurai-san – I don’t have any major concerns. The Australian housing market is quite strong, including compared with the Japanese mortgage market. Net losses are almost zero – which shows how strong performance is.

We consider whether there are any differences between the banks and nonbanks. There might be some deviation and some of the bigger nonbanks are experiencing increases in arrears. However, this is not leading to immediate concern. We will continue to study how strict issuers’ loan servicing policies are and, when wages are not going up, how tightly the issuers will recover debt. In other words, management devotion to collection of loans is something we evaluate closely.

The first rate cut in Australia has also been positive for the housing market. And while some originators are reducing buffers, our view is still that screening is generally strict – especially compared with Japanese mortgages. All this means we are not concerned about the market.

KATAHIRA I have the same view as Sakurai-san and Aibasan. Last year, because of higher interest rates, there was some increase in arrears. However, historically speaking arrears are still at a low level. I also think regulatory authorities will manage to maintain the strictness of lending policies well. We don’t foresee any significant deterioration from where we are today.

KATAHIRA ADI prime mortgage collateral used to be our preference. But last year we started dealing with one nonbank prime issuer. There will be more opportunities from these institutions so I think we will focus on these as well, going forward.

SAKURAI When we first started investing in Australian dollars, corporate bonds were the products we were buying. However, since 2016, we have been buying Australian dollar securitisation products and now we have more volume invested in these products.

Recently, we have not bought any corporate bonds denominated in Australian dollars. But current securitisation margins – of around 90 basis points for three-year product – make it possible that corporates will give us a better spread.

UEDA We have been investing in corporates all along, although we have not been able to catch up with setting up credit lines for investments for many years. Now that issuance is growing in the corporate bond market and we are better prepared to invest on our side, we would like to be more forthcoming with regard to corporate investing.