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CONTRIBUTORS

Jonathon Costello, CFA

Client Service Executive,
Western Asset

Australian investment-grade credit may be an attractive option for investors seeking defensive income profiles with limited interest-rate risk. It offers higher yields and wider credit spreads compared to similar offshore assets, despite having higher average credit ratings and shorter durations. The unique characteristics of the Australian market, such as a lack of a liquid high-yield market and a focus on maintaining investment-grade ratings, further enhance its appeal. To boost returns and diversification, investors can consider extending lending durations, exploring bank capital structures, investing in structured credit or looking offshore for high-yield opportunities and bank loans.

Key takeaways

  • Australian credit spreads are wider than those in the US, UK and Europe, offering better compensation for defaults despite higher average credit ratings.
  • The shorter average time to maturity in Australian corporate credit reduces duration risk compared to other DM countries.
  • Australian issuers often engage in debtholder-friendly activities, such as equity issuance, to maintain investment-grade ratings during economic downturns.
  • Diversification and return potential can be enhanced by exploring structured credit, such as RMBS, and different parts of the bank capital structure.
  • Offshore credit markets offer additional opportunities for diversification, including high- yield bonds, fallen angels and bank loans, which are not as accessible in Australia.
  • Working with an experienced active investment manager is crucial for effectively navigating the various segments and opportunities within both the Australian and global credit markets.

Read the full paper

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