Japanese buyers and duration: finding the limit

Japanese demand has supported Australian dollar curve extension, especially for high-grade assets like the local sovereign sector and supranational, sovereign and agency Kangaroos. But the Japanese buy side says its duration demand is finite.

DAVISON The Japanese investor base has been very supportive of tenor extension in Australian dollars – in rates product and, increasingly, credit. Starting with rates, do investors expect to see further lengthening such as other high-grade issuers joining the Australian Office of Financial Management at the long end of the curve?

ISHIDE I think super-long-dated bonds will be issued by Australian semi-governments going forward, as a result of the rising attention we are witnessing on ultra-long-dated bonds.

EDINBURGH It has been mentioned that the Australian dollar curve is relatively steep. If this were to flatten to the extent that it becomes similar to the US dollar curve, would this have an impact on how willing investors are to allocate funds to long-dated Australian dollars?

ISHIDE As the US curve becomes explicitly inbound, clearly our carry rolldown would be negative. Of course, in such a situation – especially for index players – the switch to positive from negative carry is something they would consider. If the relativity to the US curve flattens I’m sure it would have an impact on Australian outlook.

KEIJI YAMADA

Australian dollar denominated insurance is our mainstream, but this is mainly 10 years and 15 years. We need to match the maturity of our investments and, therefore, our company will invest in credit up to 15 years.

KEIJI YAMADA MITSUI LIFE INSURANCE COMPANY

DAVISON On the subject of longer-dated credit, we saw an interesting transaction in Australia recently in the form of a A$250 million (US$185 million), 20-year deal printed on 18 July by Zurich Finance Australia. Corporate issuance of anything like this tenor is very rare in Australia – what were the drivers on this occasion?

LEONG It was a large club deal priced at 4.5 per cent yield, with a spread around about three-month bank bills plus 150 basis points. If you consider where the five-year Australian dollar deal from the same issuer printed in May 2018 – at 98 basis points over three-month bank bills – the 50-plus basis points pickup for the longer-dated transaction obviously held some appeal.

The deal was anchored by Korean and Taiwanese life-insurance investors. It was targeted as a A$150 million deal and it reached A$250 million. It’s a part of the curve that Korean and Taiwanese life-insurance investors are comfortable with – they can typically invest even out to 30 years in Australian dollars.

DAVISON It would be interesting to know whether 20-year duration is too long in Australian dollars for Japanese investors. Would they like to see more opportunities – including from other sectors – in this part of the curve?

YAMADA This would be too long for us. Australian dollar denominated insurance is our mainstream, but this is mainly 10 and 15 years. We need to match the maturity of our investments and, therefore, our company will invest in credit up to 15 years.

LIFE-INSURANCE INVESTOR So far, investment in Australian dollar 20-year bonds hasn’t yet been discussed in our company. Generally speaking, a 20-year investment in a corporate bond from a Japanese company would be possible.

However, for Australian dollars, it would be difficult because of what Yamada-san has already alluded to – insurance companies match the maturities of assets and liabilities. We don’t sell insurance products in Australian dollars, so we don’t have the liability side and would therefore need to hedge the foreign-exchange portion. Tenor of 20 years is too long to hedge, which is why we think it would be difficult at this point.