Rebound in Australia Credit Lags Major Markets as RBA Holds Back
Rebound in Australia Credit Lags Major Markets as RBA Holds Back
(Bloomberg) --
Australia’s credit market is sending a message to the nation’s central bank: the unprecedented monetary easing is helping but more is needed.
The country’s corporate bonds have lagged a rally in credit this month, since the quantitative easing unveiled by the Reserve Bank of Australia in March avoids steps pursued elsewhere to buy local company debt.
Average spreads on Australian dollar notes have declined from an April peak but are still up about 4 basis points this month. That compares with a slide of about 63 basis points in spreads on U.S. dollar securities in the period.
Central banks have taken unprecedented stimulus as the Covid-19 pandemic leaves economies set for their worst spell since the Great Depression. The RBA has bought government bonds since March, and for credit has focused on helping financial institutions given that bank lending is generally a more important stream of funds in Australia than corporate notes. That contrasts with other central banks like the Federal Reserve, which expanded its purchases to include even some high-yield securities earlier this month.
The RBA has been reluctant to buy corporate credit, “while it’s been quite common in offshore markets,” said Matthew Macreadie, a Sydney-based senior investment manager of fixed income at Aberdeen Standard Investments. “The RBA is still very new in terms of quantitative easing and it hasn’t had the experience that the U.S. and Europe has had, so it’s treading slowly.”
Still, the RBA moves have helped improve liquidity in markets and boost fundraising. Local issuers sold A$3.9 billion ($2.5 billion) of Australian dollar-denominated notes in April, almost as much as the same month last year. That’s up from just one offering of A$45 million in March.
The Australian government also priced its biggest-ever syndicated bond earlier this month, with a A$13 billion offering. That may support confidence in corporate issuance, said Andrew Bartlett, a portfolio manager for credit strategies at Ardea Investment Management.
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Better liquidity has reduced stresses in less liquid asset classes such as credit, according to Bartlett. However, what’s helped even more is stronger overall sentiment stemming from the massive amount of cash being injected by major central banks directly into their credit markets, even though the RBA chose not to go down that path, he said.
Credit spreads for Australian dollar bonds still have room to come in, according to Aberdeen Standard’s Macreadie.
“This provides an opportunity to invest where the risk/return is more attractive,” he said.
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