All eyes on Australian credit: The compelling opportunity for Asian investors

This paper is a refreshed version of the original publication released in June 2024. It includes updated insights and revisions to reflect the most current information available.

With an overlapping time zone, strong governance standards, an actively traded G10 currency and relatively attractive yields, Australian fixed income has long held the interest of Asian investors.

The Australian investment grade (IG) credit market currently presents a particularly compelling opportunity for offshore investors, as AUD credit spreads remain relatively wide despite the significant tightening of credit spreads in other major developed markets (refer to Figure 1). With this attractive relative value in AUD credit we have seen a notable increase in Asian investor interest in the local market over the last 18 months.

Relative value for AUD credit

Credit spreads globally have meaningfully tightened since the Federal Reserve pivot in the second half of 2023. Over this same period AUD credit spreads also tightened, consistent with the global trend.

However, the rally in AUD credit has lagged the strength in USD credit, leaving AUD credit spreads persistently wider (refer to Figure 1). As such, a rotation into AUD-denominated credit has provided international investors with a compelling opportunity, especially when the higher credit quality and shorter duration of AUD credit are considered alongside the wider spreads.

In a further demonstration of the relative attractiveness compared with USD and EUR credit, AUD remains the only market where credit benchmark yields are meaningfully and consistently above cash rates, a position it has maintained since 2019 (see charts below).

The relative value of AUD credit compared with other assets classes is also worth highlighting. With IG credit yields around 10-year highs, they are — somewhat unusually — currently offering a more attractive income than dividends expected from ASX 200 stocks (refer to Figure 3).

The example below, using the Commonwealth Bank of Australia at the issuer level, demonstrates how investors can earn a similar yield to equity with lower risk by moving up the capital structure into debt issuance, given the high yields currently on offer.

Liquidity of AUD credit

The performance of AUD credit spreads typically lags that of the larger offshore developed market peers, namely the US and European markets, in both widening and tightening cycles.

2. Substitution of the Australian allocation of the JACI APAC Index with a more diversified portfolio of AUD credit offers the ability to achieve a comparable hedged yield, but with lower duration, greater diversification and a higher average credit rating.

Citations

1. Daniel Kaufmann and Aart Kraay (2024). Worldwide Governance Indicators, 2024 Update (www.govindicators.org), Accessed on 07 May 2025