With global interest rates remaining stubbornly low, Australian dollar debt securities have become a good option for bond investors, particularly those from the Asia timezone.
Borrowers from Australia and New Zealand have been building on their relationship with Asia-based institutional accounts, a trend reflected in a survey of investors conducted by FinanceAsia and National Australia Bank.
The poll of Asian institutional investor attitudes towards Australian debt securities was published in FinanceAsia in September and builds on evidence collected in a similar survey conducted last year. Respondents were asked to provide information on allocation strategies and indicate whether they planned to increase or decrease their exposures.
Investors representing all types of firms participated in the survey, though this year there was a larger proportion of asset managers and hedge funds that took part.
A full 71% of respondents said the proportion of their portfolio invested in Australian dollar debt securities had increased over the past 12 months, with 19% stating allocations were significantly higher.
This is a substantial uptick in activity compared to last year’s survey when 46% of participants said they had decreased their Australian debt exposures during the 2012-2013 period. At the time, the soft sentiment was attributed to a drop in the country’s cash rate during the year and anecdotal evident that Japanese investors were paring back their portfolios.
This year, nearly 28% of respondents reported having more than 10% of their portfolio invested in Australia/NZ debt securities versus 24% with this level of allocation last year. Asked if they planned to increase allocations, 23% of participants said they intended to hold between 6% and 10% of their portfolio in the asset class over the next 12 months, compared to 19% that currently hold that amount.
Commenting on the results, Connie Sokaris, general manager of investment grade origination at National Australia Bank, said even though Australian interest rates remain low by historical standards, they are higher than in most other developed markets and this is acting as a drawcard.
“Asian investors are really starting to understand the market, and based on good experiences with the asset class, are steadily increasing their allocations.” Sokaris said Australia was appealing because of its AAA-rating, its active bond market and the transparent regulatory environment.
Jessica Tilton, head of markets Asia for the bank, said the results of the survey show existing holders of Australian dollar securities are ready to increase their allocations. “In the global context, Australia offers an attractive currency and interest rate environment for fixed-income investors.”
Tilton said investors are adapting their outlook on the Australian economy as it transitions from a period of high investment in mining construction to a more balanced economy.
“This shift in reliance on the resources sector for growth is bringing new sectors to the fore and putting the spotlight on production and productivity,” said Tilton. “Financial services now represent a large portion of GDP and the agricultural sector is attracting more interest as Australia becomes a pseudo rice bowl of China.”
The survey reveals appetite for various bonds can depend on investor type, and Asia’s reserve managers such as its central banks and sovereign wealth funds, still prefer government and semi-government bonds to other securities. “These investors are more conservative and are usually bound by mandates that require investment in AAA-rated debt,” said Tilton.
The availability of commonwealth government securities has increased significantly in recent years with the Australian Office of Financial Management (AOFM) – the agency responsible for issuing debt – increasing its gross issuance programme to A$87 billion in nominal and inflation-linked bonds last year. This year it expects to issue A$67 billion. The AOFM estimates three-quarters of the world’s 30 biggest reserve managers already hold Australian government securities, and many of these are Asian institutions.
To view the full poll results in FinanceAsia’s September Australia Report, click here.