The state of Semi-Government debt
This paper aims to set out a framework for analysing sub-sovereign credit worthiness, to provide our analysis of the Australian states using this framework, and then to overlay supply-demand and valuation analysis to form an investment view of semi-government debt.
The credit worthiness of the states is underpinned by the sound institutional and economic policy credibility of the Australian sovereign, as well as implicit and explicit levels of support. The states do however shoulder a high burden of future aging expenditure requirements and infrastructure provision, without strong means of independent revenue raising, and are subject both to developments in Commonwealth-State fiscal relations as well as the co-variability of state and Commonwealth fiscal fortunes, especially relating to terms of trade volatility.
A generally improved fiscal position of the states and positive supply-demand factors have driven semi-bond spreads back to moderately expensive levels. While we see limited downside (spread widening) from here, we have moderated our constructive view considerably, trimmed positions accordingly, and view our current exposure as a hold.
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