IRISIK I believe there is room for all issuers across the spread and yield curve. At Nikko Asset Management, we have always implemented restrictions on issuer concentration across our portfolios. This means we can’t heavily invest in a single issuer or take on excessive country risk, even if it offers higher potential yield.

From a diversification perspective, spreading credit risk across issuers is crucial. This is precisely our approach. In the past, we held Province of Ontario Kangaroo bonds, which offered an attractive spread compared with other issuers. However, our exposure to these bonds was always limited. Liquidity is a key consideration, especially since we are based in the UK.

TENNANT-BROWN Taking a step back and considering how issuers have tackled the year, there has been a lot of front-loading in H1. We have talked about the risk events in H2 and as a result I expect to see financial supply tail off in the second half. Nevertheless, if conditions remain constructive, issuers may look into pre-funding for 2025. 

We issued in the Kangaroo market at the start of the year, when the relative value was quite attractive versus G3 currencies. Generally, I would say this is what drives issuers to come into the market. As the
cross-currency moves away, we start to see less supply from overseas issuers – largely because of the other options they have available. I don’t believe issuers have maxed out their capacity across markets.

When we consider how spread dynamics typically play out, the Australian market is generally slower to catch up. On this basis, after the strong first half of the year in credit markets, when issuers look at options going into H2 it is likely that Australian dollars will be less attractive on a relative value basis to other currencies. 

From an issuer perspective, we are focused on spread rather than the outright coupon. This means that while the rates story feeds into investor demand it doesn’t necessarily feed into how financial issuers are thinking about at the market in terms of cost.

Over the last couple of years, the capacity of the Australian market has grown and orderbooks have significantly increased in size. This increased liquidity could help the Australian dollar market reprice more quickly than has historically been the case. 

TENNANT-BROWN As noted, we are enjoying increasing Asian demand coming through in the Kangaroo market. As we look at our options in the tier-two space, following the successful inaugural transaction last year we continue to view the Kangaroo market as one in which we could issue more regularly – subject to pricing and market conditions. 

There is no doubt the demand is there, which is really good to see, and it is great to have the additional
option when we are looking across various currencies to meet our tier-two needs.

FISHER We have been underweight in the semi-government sector all year. But spread widening means
we have now reached levels where, in our view, it has made sense to opportunistically reduce the underweight. This is particularly the case now all the funding announcements and headline risks are behind us.

BILL Yes, it is a consideration. There has been some reshuffling lately from SSAs into the semis on the back of the spreads of the latter widening. Arguably, SSAs have become marginally less attractive on a relative-value basis – noting that SSAs still offer a very substantial spread over Australian Commonwealth government bonds compared with the spread over government securities in some other markets in which we are active. SSA spreads versus US Treasuries, for example, are much thinner than in Australia.

Across various currencies other than the Australian dollar, there has been a dynamic of some investors trying to play a currency game related to expected monetary policy normalisation. Positions have been taken and bets made on the pace of cuts – such as how quickly the varying transmission mechanisms will result in slowing economies and how quickly and what type of a slowdown we are facing.

All these factors, combined with some fiscal policy uncertainties, will affect the shape of yield curves. Inverted yield curves have been around for a long time and maybe they will linger for a bit longer.

Throughout history, however, yields are upward sloping for more extensive periods of time than they are
inverted – so at some stage curves should steepen. The question is the manner by which we will get there. Historically, also, there has been a rather sharp fall at the front end when this happens. Fiscal worries, in particular in the US and now France, can leave bear steepeners in play to some degree as well.

Meeting dealers in London this week has left me with something of a sense of complacency. Despite the
geopolitical ‘thick tails’ and idiosyncratic events that can occur here and there, there seems to be a sense of market content and a belief that things are going to be hunky dory. This worries me in the context of softening labour markets.