February 12, 2018 / 1:27 AM / 9 days ago

Kangaroo bonds make duration jump

* Asian real money investors turn their attention to 10-year segment

By John Weavers

SYDNEY, Feb 12 (IFR) - A greatly expanded investor pool is triggering a run of large, long-dated issues in the SSA Kangaroo market, in stark contrast to recent years, when mid-curve trades were in the ascendancy.

Supranationals and agencies have raised a combined A$5.9bn (US$4.6bn) from 44 Kangaroo bonds from so far this year, with A$3.8bn coming via new 10-year and 10.5-year issues or taps, to take average deal maturities out to 9.5 years.

This represents quite a shift from early 2017, when just A$1.0bn of the A$4.4bn year-ago SSA sales total was related to long-dated Kangaroos, with only three of these trades raising A$100m or more, the largest being A$150m.

Small taps or private placements then dominated the segment, targeting Japanese life insurers in search of high-yielding Triple A long-term Australian dollar bonds to hedge daily inflows from their Australian dollar-denominated life insurance policies.

“Japanese insurers still play a large part, but we are currently seeing much greater interest from fund managers, central banks and official institutions, particularly out of Asia, alongside selective demand from Australia and Europe,” said Paul White, global head of syndication at ANZ.

This year has already delivered 13 A$100m-plus long-dated issues, including two A$500m 10.5-year Kangaroos, from the Asian Development Bank and last Tuesday’s International Bank of Reconstruction and Development print. The previous IBRD 10.5-year sale in April 2026 raised A$150m. HIGH-QUALITY BOOK The latest 10.5-year offering from the World Bank funding arm confirmed the broadening real-money investor base.

Central banks and official institutions, which traditionally focus on the five-year segment, bought 64%, with asset managers and insurance companies taking 20%, while banks and corporates picked up the remaining 16%. Asia was allocated 88%, Australia 8% and Europe 4%.

Asian banks, central banks and official institutions are looking to diversify portfolios overseas, away from local markets where property, resource and bank credits tend to dominate. In doing so, they are drawn to the recent back-up in yields and relative cost of funding advantages at the long end of the Kangaroo curve. The larger, more liquid, deals now being printed further adds to their allure.

The African Development Bank priced a A$360m 3.35% 10.5-year Kangaroo on January 30 at a yield of 3.38%, a decent pick-up over the 3.1575% to 3.21% yield range for taps of its July 2027s between April and October last year.

In absolute yield terms, the ACGB/Treasury spread had narrowed from around 30bp a year ago, but remained positive at 10bp–20bp during January, whereas the five-year ACGB fell to flat to Treasuries, having offered 40bp more juice in early 2017.

“The US dollar market is compelling in the three-year to five-year segment, while the 10-year-plus Kangaroo segment is attractive on a comparative cost of funding basis. We expect this to remain the case unless yields retreat and/or the cross-currency swap basis narrows significantly,” White said.

Overall, SSA Kangaroo supply is unlikely to reach 2014’s recent annual high point of A$26.0bn, especially if five-year offering remains in the doldrums. This seems likely in the near term as the five-year ACGBs/Treasury spread had fallen to negative 15bp last Thursday as US yields ratcheted higher. The 10-year spread tightened to just positive 2bp.

Three-year to four-year issuance withered after 2011, when the Australian Prudential Regulation Authority left Kangaroos off its list of high-quality liquid assets for Basel III purposes, thereby depleting the natural bank-balance-sheet demand for this short-term paper. (This story appeared in the February 10 issue of IFR Asia magazine; Reporting by John Weavers; Editing by Vincent Baby and Daniel Stanton)

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