Stephen Knight of New South Wales Treasury Corporation explains some of the features and merits of Australian bonds, and looks at how and why these are suitable products for Asian high net worth investors.
Date: Oct 2010
Tags: Bonds, Australia, Yield, Debt, Credit rating
According to Stephen Knight in an interview, there has never been a better time for investors to buy Australian-denominated debt.
This is for a variety of reasons. First, he explained, the strength of the Australian economy in general, and in particular how it has performed in recent years, has left the market with a high yield structure – making the yields available to investors attractive compared with what is offered in other developed economies.
Secondly, the underlying economy story is strong both for Australia as a whole and its individual states. For example, in the case of New South Wales, given that it is the largest and most diversified of the states, Knight said it serves as a proxy for Australian growth. At the same time, it offers investors a yield pick-up over Commonwealth government securities but still with a triple-A rating.
Thirdly, he said, the Australian currency has performed well, so for investors looking for an extra pick-up, Australian debt can offer this.
And while the outlook for the country’s economy remains positive, Knight said there is every reason to expect its currency to remain strong.
Access for Asian high net worth investors
Knight explained that New South Wales Treasury Corporation (TCorp) offers bonds across the yield curve, from short-dated debt to paper with around 12 to 13 years’ maturity.
Those bond issues are concentrated in TCorp’s benchmark lines, he added, and are predominantly sold in large volumes through the 13 banks which participate on the issuer’s dealer panel and then distribute the bonds to its investor base.
While those bonds are mainly bought by institutional investors, Knight said that in many jurisdictions the bonds are sold through the dealers to high net worth individuals.
He said that TCorp currently has about A$60 billion worth of debt on issue through its programmes – which is double the level it had four to five years ago. In each year, he added, TCorp issues anywhere from A$10 billion to A$15 billion of new debt to fund infrastructure investment domestically, including water, utilities, transportation and electricity.
Explaining Australia’s strong performance
According to Knight, the headline reason which most people focus on for Australia’s strong economic performance is the country’s strong trade links to China and other parts of Asia.
But there is more to the story than that, he explained. For instance, both regulators and organisations took on board the lessons of the recession in the early 1990s, leading to governments at federal and state levels spending much of the last 15 years getting their balance sheets in order.
This meant the country went into the financial crisis in 2008 with low levels of net debt at the government level, said Knight. In turn, it was in a strong position to stimulate the economy without having to sacrifice Australia’s triple-A rating.
Another factor which Knight said has contributed to Australia’s strong performance is the fact that the regulatory model and the banks were also both in good shape in the run-up to the financial crisis – something which he also puts down to the lessons learnt from the recession of the early 1990s.
