Global outreach is a high-ranking factor in keeping the Australian market relevant and maximising its liquidity. This means both international investor participation at the primary stage and the ability to maximise secondary bid and offer capacity via global distribution.

In one of the more surprising KangaNews Awards results in recent times, Citi rode the strong support of Australian fund managers to be acknowledged as Australian Dollar Credit House of the Year – Secondary Market in 2016. Since 2010, this award and its historical equivalents have been dominated by Australian major banks and their larger local balance sheets.

But the local buy side is growing in sophistication in how it views non-Australian dollar credit and its hedging methods, suggests Youssef Abawi, Sydney-based head of credit sales, Australia at Citi. He comments: “Many firms in our region are not working nine-to-five hours. Whether it is during a New York or London session, fund managers are generally working hard to source the bonds they want.”

Abawi says Australian investors are responding to challenging liquidity conditions by adding resources to their own trading desks. “A client can gain a comparative advantage by being a global shop, but even so if they pick the wrong name and credit spreads widen – and if they are not attuned to the technicals around a certain name – they can lose this advantage.”

He adds: “We are seeing more local fund managers ensuring they have the right people on the ground to carry out their credit work via the right processes, even if this is in a time zone beyond their normal operating hours.”

Abawi also claims that continued development of the Australian dollar credit market’s depth and breadth depends on deals being pitched to global real-money accounts, including private banks and insurers, as well as the domestic buyer base. “The local market needs this depth of liquidity,” he tells KangaNews. “If transactions can appeal to a broader client base than the domestic real-money segment the street will try to provide liquidity.”

A challenge for fund managers is the accuracy of local marks. However, Abawi says his experience is that investors are realistic about their ability to buy or sell at a rate-sheet level. They understand that they can get a more accurate picture by accessing pricing marks through several different sources.

“Clients are unable to source bonds just at the Bloomberg [index] levels,” he adds. “Yieldbroker gives a sense of how many pricing distributors there are and this can be used in conjunction with something like a Bloomberg runs-manager function to assess the accuracy of levels.”

Liquidity tools could be a useful value-add for the local market, Abawi adds. “In the US, every time a 144A-eligible bond is traded the trading volume and level are reported into the TRACE [Trade Reporting and Compliance Engine] system and onto Bloomberg. It will be challenging to develop any kind of sophisticated liquidity tool until we get to a point where we have this kind of system in Australia.”

While liquidity remains challenged there is also increased scrutiny on dealers. “Clients are cognisant that just looking at Yieldbroker or rate-sheet levels in isolation is not going to give them the fullest picture of the market,” Abawi suggests. “Investors are also more attuned to technicals and are more interested in how dealers are positioned, the inventory they carry and in the levels of bonds they are turning over.”