Fixed Income

The state of Semi-Government debt

04/12/2014

Stuart Dear

Stuart Dear

Deputy Head of Fixed Income

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.

Important Information:
Opinions, estimates and projections in this article constitute the current judgement of the author as of the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 ("Schroders") or any member of the Schroders Group and are subject to change without notice. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This document does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. Schroders may record and monitor telephone calls for security, training and compliance purposes.