Rewriting the Rule Book for Debt Markets in 2023

By Harald Eikeland
Published May 5, 2023 | 3 min read

Despite a difficult 2022 which left investor sentiment in a fragile state, the state of debt markets moving into 2023 was strong – until the music paused.

A strong start to 2023

It has been a constructive start to 2023 for debt markets according to a panel at the recent KangaNews Debt Capital Markets Summit. RBC Capital Markets’ Harald Eikeland, Director, Debt Capital Markets, characterising it as a ‘stonker’ with strong Sovereign, Supranational and Agency (SSA) issuance in January in benchmark size along with major bank issuance. These initial transactions set pricing, resulting in higher new issue concessions for initial deals and ultimately the tone of the market.

Momentum quickly built in the credit and financials sectors, as well as in the rate space with constructive credit spreads and swap spreads more generally, leading to a period of active issuance lasting eight to ten weeks.

One panellist shared they were up to 55 billion AUD on year-to-date issuance, a 40% increase from the same period last year, reflecting the strong start. During this period, there was a compression of credit spreads and oversubscribed order books, with price revisions occurring during the book build process. Just days prior to the panel some financial deals were pricing at a record for the year.

Eikeland commented that “coming into 2023 there was more bullishness in the market, and the spreads offered to investors over swap and government bonds became more attractive.”


Diversity driving Australian market appeal

The depth of the Australian market has been improving over the years, as reflected in the increasing presence of offshore issuers. The depth of investors has also increased, with interest coming from both local and offshore investors.

Panellists agreed that diversification is benefiting the Australian market as bank and central bank reserve managers as well as major investors, diversify away from mainstream currencies like US dollar and Euros into Australian and New Zealand dollars.

On why the Australian market is so appealing, Eikeland believes that investor diversity is the main driver. “As a global issuer coming to the Australian market pricing sometimes is favourable, and sometimes it's not, but I don't think that is the main driver. I think the key is the ability to diversify your investor base. Giving issuers more opportunity particularly in challenging markets” Eikeland said.

One panellist further explained that many of the global issuers are already well known in Asia, and Asian investors are familiar with their credit profiles having bought or held them in dollars or euros, so there is a pre-established comfort level to buying in Aussie dollars.

Other panellists shared that they had basically doubled their presence in Australia on an annualised basis with an outstanding figure hovering at around 14-15 billion. Reinforcing how attractive the market has been for offshore issuers into Australia.


And then the music paused – is global market volatility impacting funding strategies?

The panel discussed the impact for debt markets of the volatility in global banking, following the SVB collapse and the Credit Suisse merger. With unanimous agreement that stability was the priority and increasing liquidity as a risk mitigation tool was second.

In terms of weathering volatility, the panel agreed they need to monitor markets continuously and be nimble. Noting that Asia Pacific stability provides a good benchmark for the impact domestically. One panellist asserted that the isolation or the distance from Zurich and Silicon Valley will help enable planning to proactively manage the balance of requirements.

Another argued that in these circumstances liquidity didn’t disappear, it was simply being parked while markets stabilise. The tightening of spreads as a result of monetary policy would have an impact on the current volatility, and timing is always uncertain. However, some remain focused on long term strategies, claiming a flight to quality was likely amid the recent turmoil.

Eikeland shared a more bullish outlook, “As soon as we see a functioning market offshore. Why should we wait? I think 2023 will be a year where it is important to pick your windows. And if that's next week, let's go.”


Deal flow pipeline: Looking at the big picture

All agreed that when markets are volatile issuers adopt a holding pattern. When looking at prior periods, one panellist believed that after a more challenging 2022, the order books were much stronger both domestically and offshore. The return of Asian demand also fared well for the 2023 outlook across the region.


Absence of corporate issuance

However Eikeland did flag that corporate issuance had been a notable absence at the start of 2023. Limited corporate issuance in the domestic bond market can be attributed to the loan market being more competitive than the bond market last year, however one panellist noted that equilibrium has been reached this year which may provide confidence to corporate treasurers.

Eikeland concluded, “Of late it's hard to be incredibly bullish, in this environment where rates are going up. Corporates are refinancing at higher yields which is becoming the new normal. Businesses will need to adapt and some issuers will fare better than others.”

Harald Eikeland

Harald Eikeland
Director, Debt Capital Markets
RBC Capital Markets, Australia

AUDAustraliaDebt Capital MarketsIssuanceKanganewsLiquiditySSA