Kangaroo Bond Market Awakened by Attractive Swap Levels
(Bloomberg) -- The ripple effects from the recent flood of central bank liquidity have kick-started the moribund kangaroo bond market, where overseas companies come to raise money in Australian dollars.
Of the 13 deals this year, five came in the past two weeks with a flurry of supply from European and South Korean firms, while a Canadian issuer tapped an existing bond. Above-average premiums in cross-currency basis markets have made it advantageous to borrow in Australian dollars through a bond issuance and then swap the proceeds overseas.
Premiums added to three-month rates in Aussie-euro 10-year basis -- which is how traders quote them -- have risen to 51 basis points from a low of 34 in late March. The equivalent for Aussie-Korean won 3-year basis is 107 basis points, which compares to a 2-year average of 96.
In contrast, there have been no new American kangaroo bond issues so far this year, after 10 in 2019, with the premium for Aussie-U.S. dollar basis swaps back to levels seen in 2018.
Kangaroo bond sales have been in a declining trend, with last year’s A$21.1 billion ($13.9 billion) issuance being the lowest in four years, according to calculations by Bloomberg. Sales have topped A$7 billion year-to-date.
Lower Australian bond yields both on an absolute basis and relative to U.S. rates markets have sapped demand for kangaroo bonds, according to Martin Whetton, head of fixed income and FX strategy at Commonwealth Bank of Australia in Sydney.
Meanwhile, U.S. investment grade issuance is running 90% ahead of 2019, with some strategists calling for a record year of sales. Over in Europe, issuance is 30% ahead of last year.
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