Hopping on the rise of kangaroo bonds
Zenith Investment Partners has detailed how advisers can jump on the new opportunities offered by kangaroo bonds.
The evolution of the fixed income market has brought kangaroo bonds along with it, which are issued in Australia by foreign companies.
“Australian dollar-denominated bonds issued by non-resident entities in Australia are referred to as kangaroo bonds and represent a significant share of the Australian bond market,” according to the Reserve Bank of Australia.
Andrew Yap, head of multi-asset and Australian fixed income at Zenith Investment Partners, noted that kangaroo bonds represent 62 per cent of the non-government bond segment, translating to approximately $188 billion in market value.
“This growth has been driven by European and APAC-based banks, who are tapping into our strong local demand and diversifying their sources of funding,” he explained.
The strong domestic demand for investment-grade bonds paying a premium above cash rates has enabled kangaroo bonds to thrive, as investors look to capitalise on favourable pricing relative to global markets.
Zenith’s analysis illustrates that bond managers with a global capability have consistently generated superior portfolio outcomes compared to domestic issuers, Yap said.
“While other factors influence performance differentials, and market conditions may favour one approach over another at times, we believe that the growing number of global factors on domestic markets underscores the value of a robust, globally informed investment strategy.
“For Australian financial advisers, understanding and leveraging these global connections can unlock new opportunities and drive outperformance in the evolving landscape of Australian fixed interest,” he continued.
A key challenge for investors and advisers seeking access to kangaroo bonds is the need to place bids in tight time frames, typically between 24 hours and 48 hours. Firms with a network of global credit analysts hold a significant advantage with real-time insights and on the ground surveillance.
Yap commented: “At Zenith, we acknowledge the merit of both global and local-only approaches, believing the successful execution of an investment strategy is closely aligned with the quality of the domestic investment team.
“Nevertheless, we believe that managers with access to offshore resources are better positioned to place bids with greater precision with respect to pricing, and this has the potential to translate into improved risk/return outcomes.”
AUTHOR
Jasmine Siljic
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