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Fatter Aussie Spreads Boost Fund Manager's Credit Risk Appetite

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  • Fund manager is betting on Australian credit out to five years
  • Corporate bond market unlikely to be ‘knocked over by supply’

Nikko Asset Management’s Australian unit has shifted more of its corporate bond portfolio away from the shortest-dated notes and into securities due in as much as five years.

The money manager, which oversees about A$10 billion ($7.6 billion) in fixed-income assets in Australia, boosted its appetite for credit risk in the first three months of 2016 as company bond spreads widened and opportunities emerged to buy longer-duration assets, said John Sorrell, Nikko’s head of credit in Sydney. The firm expects stimulus from global central banks to provide ongoing support for corporate notes Down Under, as will an imbalance between supply and demand. He remains more circumspect about paper with tenors longer than five years.

Although the average yield premium over the swap rate on company debentures in Australia has fallen to 110 basis points from a peak of 127 in March, it remains 19 basis points above the level it was at a year ago, a Bloomberg AusBond index showed as of Aug. 3. And while there has been enough new issuance to absorb cash from maturing debt, the Aussie market’s unlikely to be “knocked over by supply,” according to Sorrell.

“We are still keen on credit in zero-to-three years paper, but we are now probably more likely to go into three-to-five years,” Sorrell said in an interview. “A year ago we were probably more negative when spreads were tighter and there was less compensation for risk.”

European Pressure

Measures such as the European Central Bank’s asset purchase scheme should continue to weigh on credit spreads, Sorrell said. While the ECB may not be buying Aussie paper directly, its activities are helping to push European managers into other markets such as Australia, he said. Australian spreads are at “reasonable levels” on an historical basis and there doesn’t appear to be any immediate catalyst for a credit downturn, the money manager said.

Investment-grade global corporate bonds suffered a bigger blowout in spreads earlier this year than their Australian peers and as a result have also tightened more than Aussie notes, Bloomberg index data show.

Aussie company bonds due in three-to-five years have provided a total return of 4.7 percent so far in 2016, while those due in less than three years have gained just 2.5 percent, Bloomberg AusBond index data show. While longer-dated notes have delivered larger gains as overall bond yields have compressed, Sorrell said he’s “less keen on very long credit in terms of duration exposure to spread.”

For debt due in less than five years, Nikko will probably hold more bonds than its benchmark would indicate, while for longer notes it’s likely to hold close to the index, Sorrell said.

“We are more positive about credit in the short-term, but still keeping it relatively short,” he said. “If the worst comes to worst the four-to-five year tranche reasonably quickly shortens while rewarding with extra spread.”