In contrast with weak demand [in an auction] for a new United States government bond – which saw the 30-year U.S. government bond yield spike to 5.096% - Australian bonds are experiencing strong domestic demand.
If rates continue to decline as currently expected, securing a fixed income of at least 5.5% should serve [income] investors well.
Highlighting activity in Australia’s over-the-counter bond market in the last week were two big banks issuing subordinated debt along with other corporate issues, a commercial asset-backed security (ABS) issue from Humm (ASX: HUM) and a credit card ABS from Latitude (ASX: LFS).
Two bank issuances
Westpac (ASX: WBC) and Macquarie (ASX: MQG) were both on the market raising Tier 2 subordinated debt over the last week.
Based on previously flagged interest on a new fixed rate note, Westpac raised $1.5 billion in a 15-year, non-call 10 (15NC10) fixed rate issue.
While initial indications pointed to a fixed coupon of 6.105%, recent new issues suggest this will launch in the high 5’s.
Meanwhile, Macquarie raised $1.25 billion in a dual-tranche fixed and floating rate note.
With an order book of more than $6.7 billion and only $1.25 billion issued, underlying demand was strong with bonds instantly trading higher at around 101 cents.
Price guidance was:
• Floating rate tranche 3-month BBSW + 200bps.
• Fixed to floating tranche 220bps over semi-quarterly swap.
• Floating rate tranche - 3-month BBSW + 185bps.
• Fixed to floating tranche 195bps over semi-quarterly swap, which is a 6.1456% coupon.
Other new issues include:
• A five-year senior unsecured bond from Goodman Group (ASX: GMG), which raised $500 million with a 4.742% coupon.
• Avanti Finance launched a 4.4-year senior secured bond seeking $100 million with price guidance of 3-month BBSW +475bps.
• Contact Energy (ASX: CEN) raised $400 million in a 6.5-year senior unsecured green bond with a 5.414% coupon or 157bps over semi-quarterly swap.
• Transurban Queensland (ASX: TCL) launched a 7.25-year senior secured fixed rate deal with price guidance of 170bps over semi-quarterly swap.
Meantime, in an exciting development, online investment and trading platform Stake launched an actively managed fixed income fund.
Minimum investment is just $500 with a small minimum addition of $10.
It has an automated reinvestment feature – which is great for young, new investors.
The stake is aiming to deliver the entire RBA-plus 2% p.a. income to investors.
Fees include a 0.51% p.a. management fee, plus recoverable expenses up to 0.36% p.a.
US exposure
Meanwhile, given that markets don’t like uncertainty, bond expert Elizabeth Moran noted that Trump’s tariff policies and tax cuts have investors second-guessing their U.S. exposure.
With a declining U.S. dollar and deficits remaining above 6% of GDP, Moran is witnessing a reallocation of capital by major asset managers to higher-yielding European and Asian sovereign debt.
“The concern is that to keep borrowing, yields may have to rise further,” she said.
Robert Almeida from MFS Investment Management says surging U.S. government bond yields reflect what he calls an uncertainty premium.
He believes borrowing costs for companies and consumers may remain elevated even if the U.S. Fed cuts rates this year.
While the word ‘uncertain’ has clearly spiked in U.S. Fed papers since Trump was elected President last year, Mitch Reznick, from Federated Hermes suspects it could be positive for credit markets with companies hanging onto cash, instead of investing, reducing credit risk.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
