Asset class creep
Many international investors, most notably some major accounts from Japan, have broadened their Australian dollar holdings into higher-yielding asset classes. Market participants argue this is largely additional to their demand for high-grade bonds, though.
WHETTON I’d say very little, because there are very distinct investor cohorts with different motivations. Generally, the Japanese have been very uncomfortable with the idea of credit. They simply don’t understand it as well.
Fund managers and life insurers are attracted to supranational, sovereign and agency bonds and buy synthetically via cross-currency swaps. I would argue that semis will come back into favour as yields rise on an outright basis. These investors like sovereign credit and, as sovereign and subsovereign yields rise, they are more likely to prefer high-grade paper than they are to invest in corporate credit.
Bank books, on the other hand, are very active in residential mortgage-backed securities (RMBS) and corporate credit. I expect this to continue to be the case.
DONALDSON Investors in corporate credit are opportunistic, in the sense that they are very willing buyers of 10-year paper if they can get supply which meets their yield hurdles.
In practice, the actual volume of corporate debt going into Japan remains contained with the vast majority ending up in US dollar private placements because of the depth of that market.
I agree with Martin Whetton that the move down the credit spectrum into RMBS is driven more by the banks than it is by any other investor cohort. Data on RMBS deal flow show demand is very strong and increasing. We think Japanese financial institutions will continue to boost these holdings.
EVERITT The move into higher-yield asset classes has had negligible impact, from what we can see, in primary or secondary. I don’t see this changing. I think there will be enough volatility in markets to keep Japanese investors engaged in the higher-rated space.
MCCOLOUGH It is not an allocation out of governments or semis into credit and RMBS per se. Investors are seeking additional yield but not at the expense of their high-grade investments. In fact, Japanese Ministry of Finance data clearly show that sovereign flows are unchanged in the last 12-24 months.
GRICE Some asset classes are benefiting from new money from different investor types – and, as others have said, RMBS is probably the best example. For corporate credit, the marginal dollar is going into longer-dated credit and this is at the expense of the high-grade sector. But credit is still a scarcely available asset out of Australia.
The move into higher-yield asset classes has had negligible impact in either primary or secondary. Going forward, I don't see this changing. I think there will be enough volatility in markets to keep Japanese investors engaged in the higher-rated space.
GRICE That’s right. These investors have regular cash flows to invest and this doesn’t always line up with the availability of long-dated corporate bonds. Corporates aren’t very liquid either. It is fair to say that demand is greater than supply in longer-dated credit names for Japanese investors
EVERITT This is absolutely the case. It has been by name and by supplementary that they have come in. Some of these investors have new mandates which enable them to buy credit, RMBS or other products available in Australia.
These firms probably started off in the high-grade market and they continue to play there – but their mandates have evolved to enable them to participate in other asset classes. This hasn’t necessarily been at the expense of the initial asset classes.
