It’s 1 July. The flurry of 30 June has passed, and 52-year-old Diane and her 54-year-old husband Peter are now…
Written by Rachel Polglase Published: June 27 2019 Investments
I have mentioned in previous posts that investors were holding more credit risk at the start of 2017 than they have in recent years. This could reflect many things.
A few likely candidates are: recent credit performance, lack of alternative sources or return, or a forward view that corporate balance sheets remain strong.
ITRAXX Australia – Recent History
Some causes for concern are apparent though. For one, credit spreads are near the lowest they have been since the Global Financial Crisis. This is shown below by the ITRAXX Australia index (description here if you are unfamiliar with it) a key market benchmark for Australian credit spreads.
It is interesting to see just how large the move higher in early 2016, bumping the index up about 80 basis points, even though in hind sight the credit risk changes that caused it are not that memorable. Primarily it was a flow through effect in commodity markets based on China growth fears that created worries or broader Australian growth. Similar fears or just reversion to the average may lead the index near 110 basis points later in 2017.
Australian Credit Risk is Banking Sector Risk
Corporate borrowing is heavily concentrated in the banking sector. The Bloomberg AusBond Credit 0+ Yr Index is designed to track Australian dollar credit risk by market weight. The index membership is 51% financials comprising 48% of the index by market capitalisation.
Better Opportunities Ahead
So with the above factors in mind, investors with the capacity to wait to take credit exposure may find that advantageous. Spreads are historically low and the influential banking sector faces a few near-term headwinds. If this view is correct then re-evaluating the spreads on offer after a 30 basis point widening seems reasonable. On the contrary if the RBA or ratings agencies were to give future reassurance on the housing sector or bank ratings the reasons to wait for widening would diminish.