Japanese buyers and duration: finding the limit
Japanese demand has supported Australian dollar curve extension, especially for high-grade assets like the local sovereign sector and supranational, sovereign and agency Kangaroos. But the Japanese buy side says its duration demand is finite.
ISHIDE I think super-long-dated bonds will be issued by Australian semi-governments going forward, as a result of the rising attention we are witnessing on ultra-long-dated bonds.
ISHIDE As the US curve becomes explicitly inbound, clearly our carry rolldown would be negative. Of course, in such a situation – especially for index players – the switch to positive from negative carry is something they would consider. If the relativity to the US curve flattens I’m sure it would have an impact on Australian outlook.
LEONG It was a large club deal priced at 4.5 per cent yield, with a spread around about three-month bank bills plus 150 basis points. If you consider where the five-year Australian dollar deal from the same issuer printed in May 2018 – at 98 basis points over three-month bank bills – the 50-plus basis points pickup for the longer-dated transaction obviously held some appeal.
The deal was anchored by Korean and Taiwanese life-insurance investors. It was targeted as a A$150 million deal and it reached A$250 million. It’s a part of the curve that Korean and Taiwanese life-insurance investors are comfortable with – they can typically invest even out to 30 years in Australian dollars.
YAMADA This would be too long for us. Australian dollar denominated insurance is our mainstream, but this is mainly 10 and 15 years. We need to match the maturity of our investments and, therefore, our company will invest in credit up to 15 years.
LIFE-INSURANCE INVESTOR So far, investment in Australian dollar 20-year bonds hasn’t yet been discussed in our company. Generally speaking, a 20-year investment in a corporate bond from a Japanese company would be possible.
However, for Australian dollars, it would be difficult because of what Yamada-san has already alluded to – insurance companies match the maturities of assets and liabilities. We don’t sell insurance products in Australian dollars, so we don’t have the liability side and would therefore need to hedge the foreign-exchange portion. Tenor of 20 years is too long to hedge, which is why we think it would be difficult at this point.