New Zealand retail investors will have to crank up the risk or accept lower fixed income returns as a raft of high-yielding corporate bonds mature this year.
About $6 billion in high-coupon local retail corporate bonds were set to retire this year with roughly one-third of that capital paid out in the first quarter.
Grant Hassell, AMP Capital head of fixed income, said approximately $3.7 billion in retail corporate debt issues will mature over the remainder of 2015, starting with $800 million in Fonterra bonds set to expire on March 10.
Hassell said investors would struggle to secure similar yields as the maturing bonds – which have a weighted average coupon of about 7 per cent – for the same level of risk.
He said with falling interest rates and less retail corporate issuance – especially at the higher quality end of the market – investors could end up chasing yield in equities or hybrid debt products.
“As long as investors realise they’re taking extra risk by buying equities or going down the capital structure [by investing in hybrid debt] that’s ok,” Hassell said. “But some investors may not be aware that by investing in a tier one bank hybrid product, for example, they’re taking on substantially more risk.”
According to Christian Hawkesby, Harbour Asset Management head of fixed income, investors should be consider what they replace the maturing bonds with in a portfolio context.
“If they’re just chasing yield then investors will have to take on issues with lower credit ratings or products lower down the capital structure,” Hawkesby said. “But if their primary reason for holding fixed income is to hedge riskier assets then they need to include assets that will perform well in a stressed environment.”
He said investors could consider gaining a fixed income exposure via funds, which manage portfolio credit and maturity risks closely.
Hawkesby said investors waiting for good retail bond issues to come along “would have to be patient”.
According to Hassell, wholesale funds would have to replace some of the same maturing bonds as retail investors this year, too.
“But we’re interested in the spread relative to the benchmark [rather than chasing nominal yields],” Hassell said.
He said AMP Capital has found opportunities in the New Zealand local government bond market – now managed centrally – and even the Australian corporate bond market.
“Australia doesn’t have a very deep corporate bond market but the spreads tend to be better than in New Zealand,” Hassell said.
In fact, he said because of the voracious demand for retail bonds in New Zealand, Australian companies can raise debt much more cheaply here than in their home country.
“New Zealanders seem to like yield and they’ll take whatever risks to get it,” Hassell said.
However, Hawkesby said New Zealand retail investors are beginning to adjust to “a realistic running yield in their portfolios.
“People are getting used to lower yields,” he said.