Good value is emerging in Australian credit, with several factors set to continue to offer support to the market over the next 12 months, according to Helen Mason, fund manager at Schroders.
"The Australian economy has lagged global economies, particularly in terms of the rate cycle. So, the spread on Australian credit, which is the risk premium attached to a particular bond, has remained relatively wide when you compare it to its global counterparts," Mason says.
2024 was a record year for Australian credit issuance with the continuing growth in the AusBond Credit Index.
"We have a unique situation in Australia where the Australian Prudential Regulation Authority (APRA) has decided that we will no longer be able to access wholesale Tier 1 bonds for the Australian banks. To replace those Tier 1 securities, we have had an increase in Tier 2 issuance," Mason says.
Retail Tier 1 bank hybrids have been very popular among retail investors who are now looking for investment alternatives as Tier 1 capital phases out by 2032.
"One of the key differences, for Schroders’ high yielding credit fund, is that offshore banks will still be issuing tier one paper into Australia, and we can still access that within our funds and take advantage of the broader opportunity set," Mason said.
"We think the returns look promising this year, because both interest rates and credit are expected to lend support to returns this year, where it was basically only credit last year, so we believe there are still pockets of opportunity this year," Adam Kibble, fund manager at Schroders says.
Falling inflation, with the expectation that it will fall below the RBA's target of between 2 and 3 per cent, will allow the RBA to cut rates potentially earlier, and by more than the market anticipates.
"That's going to be supportive of corporates and the households that we effectively lend to and that lowers credit risk, meaning credit spreads should continue to narrow," Kibble said.
There are other global factors which will exert a positive influence on the Australian credit market, with more international investors looking to invest in Australian bonds.
"Part of the reason for that is what's happening in our markets is the China growth story. As China growth has rolled off, there's been less issuance of corporate credit, because there just isn't the demand. So Asian investors have been looking to Australia for opportunities to invest, particularly with our relatively wide credit spreads," Mason says.
"With higher involvement from offshore investors, we've had a demand surge as well as a supply surge. We have had a supportive balance of great supply and great demand, and that's been helping Australian credit this year and last year," she added.
Kibble says that one of the biggest issues for global credit in 2025 is the threat of tariffs in the US. In general, tariffs raise prices and lower growth because they reduce trade.
"Tariffs are not good for productivity or inequality, but the more important thing is how the Federal Reserve reacts to tariffs and the impact of inflation and growth.
“If economic growth falls and unemployment rises, we think they are more likely to cut rates, which will support the economy and will generally be supportive for credit," Kibble says.
