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Australian corporate bond yields 40pc higher than equities

Australian Financial Review (AFR)

Originally published in the Australian Financial Review on 3 May 2018 by Duncan Hughes
Australian corporate bond yields 40pc higher than equities

Yield-starved wealthy investors are dipping into the nation's $1 trillion corporate bond market for average returns 40 per cent higher than local equities or even higher than dismal rates on offer for cash deposits, analysis by Deloitte Access Economics reveals.

About 16 per cent of high net worth investors, who typically have about $2m worth of assets in addition to their home, have around 11 per cent of their portfolios invested in rated and unrated debt, their highest asset exposure after property, equities and cash, the survey shows.

But local investors hold less than 1 per cent of corporate bonds compared to almost 20 per cent of US investors, while  Australian super funds hold only 10 per cent of their assets in bonds compared OECD countries' average exposure of about 40 per cent.

The analysis, which was undertaken with FIIG Securities, a bond specialist with about $11 billion under management, said the low domestic exposure could be because other countries mandate that retirement funds hold a higher proportion of fixed income.

"But a number of conditions – such as an increasingly ageing population – mean the Australian bond market is well positioned for further development," said Jim Stening, founder of FIIG.

Equity markets 'uncertain'

Investors, particularly retirees, are attracted by average gross returns higher than Australian and international securities and low returns from most cash deposits on offer from banks.

"There are a growing number of unrated corporate issues in the Australian bond market that have initial yields of four to six per cent above government bond yields," according to John Omahony, a partner at Deloitte Access Economics. 

Fund management groups are also tapping into the growing demand for higher yielding products, particularly from self-funding retirees.

Thinktank Group, a specialist commercial property lender, is today launching two investment funds investing in bonds with yields between 5.3 and 8.5 per cent.

An income trust will offer secured first mortgage commercial debt and a high yield fund will invest in secured second mortgage commercial property loans.

"In an oversaturated and uncertain equities market, investors are continually looking for alternative sources of debt investment," said Thinktank chief executive Jonathan Street.

Interest payments will be made monthly.

To get access to the the full Deloitte Access Economics Australian Corporate Bond Report, click here

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