LISTEN: a stronger year for bonds

A strong start and improved market conditions, including healthy liquidity and previously priced-in rate rises, are all adding up to a positive 2023 for bond markets, according to Jimmy Choi, Head of Capital Markets, ANZ Institutional.

Speaking with colleagues on podcast ahead of the ANZ Debt Conference in March, Choi said market dynamics meant investors are chasing supply, pointing to a solid medium-term outlook after an already strong start to the year.

“I actually think we'll see a relatively strong year in the bond markets,” he said. “Liquidity is strong. And I think a lot of the rates noise was taken in last year.”

The volume of maturities coming due, combined with the end to a shift toward loan markets seen in 2022, all mean “a lot of paper needs to be refinanced” in the New Year, according to Choi.

“I think those dynamics will shift back to some equilibrium in the bond market,” he said. “We're very excited.”

Choi made the comments in discussion with Suzy Ramos, Director, Syndicate, and Emily Tonkin, Executive Director, Sustainable Finance at ANZ Institutional. You can listen to an edited version of the conversation on podcast below.

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As usual

After an historically unusual period of bank issuance, which saw wild fluctuations in activity during the pandemic and post-pandemic period, Ramos said issuers are ready to get “back to business as usual” in 2023.

“There's a large re-financing task this year, with the Term Funding Facility redemptions kicking in,” she said, referring to the beginning of the end to low-cost, three-year funding the Reserve Bank of Australia offered to qualifying financial institutions at the height of the pandemic.

Ramos said given the number of risks to market conditions, several issuers have begun to think about prefunding, particularly in the fourth quarter of 2022. That is a theme that has continued into the start of this year, she said.

Tonkin said ANZ had noted a rise in sustainable-finance labelled issuance from financial institutions so far in 2023.

This shows ‘sus-fin’ is “definitely not off the table” for investors, despite a dip in activity in recent times. Although 2022 was a strong year, sustainable finance failed to hit the high watermark seen in 2021 – a fact Tonkin puts down to broader malaise on bond markets.

“I think we'll see another big boost in sustainable finance issuance,” she said – driven largely by sustainability-linked products, which have broader applicability for issuers.

“I think going forward from there will continue to see a lot of sustainability linked instruments, both sustainability linked loans and bonds,” Tonkin said.

Both Ramos and Tonkin confirmed the ongoing existence of the ‘greenium’, a phenomenon where sustainable finance issuance secures premium pricing compared to elsewhere on the market.

“We’ve been seeing this trend for some time, but as assets under management continue to grow, the amount of liquidity chasing these assets continues to increase,” Ramos said.

Cluster

September looms as a key date for financial issuance, according to Ramos, as the “first real main peak” of TFF redemptions run off.

As a result, “there may be a bit of a clustering effect, if I can call it that, as we approach that deadline” she said. “We may see a bit more of a rush to market.”

That could have a potential impact on credit spreads, Ramos said, depending on the velocity of the pipeline. There's also a background concern about market liquidity drying up, she said.

FI issuers are wary of an inflection point around that time where investors begin to slow down, Ramos said. They are also keenly watching global central banks for interest rate moves.

For her part, Tonkin is confident in the outlook for sus-fin, as issuers reassess the importance of responsible investment to their businesses.

“What we're really starting to see is corporates - particularly larger corporates that have financial structures underneath them - …looking at the sustainability-linked instrument suite,” she said.

“I think that sends a really powerful message - for those corporates to be able to say, ‘we're so focussed on ESG we are going to put it into our financial stack, we're going to incorporate it all the way through, and we're really going to… try to achieve these ambitious sustainability targets’.

“I think we're going to be seeing a lot more of that.”

Listen to the podcast above to find out more.