SYDNEY: Australia’s A$1.5 trillion bond market is attracting interest from borrowers in Latin America and the Middle East, as they seek to diversify their portfolio and lower funding costs in the world’s fourth-largest pension savings pool.

National Bank of Abu Dhabi, First Gulf Bank, Emirates NBD, Abu Dhabi Commercial Bank and Banco Santander Chile raised this year A$1.3 billion ($1.20 billion) through five kangaroo bonds — Australian dollar-denominated debt from foreign issuers and there is more to come.

Banco de Chile could be next, having met Australian investors recently, according to two portfolio managers.

A big help to kangaroo issuance is a favorable move in the Australian-US dollar cross-currency basis swap rate, an instrument that borrowers use to swap into foreign currencies.

The Australian dollar/US dollar 3-year currency basis swap ICAB2, which impacts the cost of swapping currencies, widened to 23 basis points from around 16 basis points since February, making it cheaper to swap Aussie dollars for the US currency.

Robert Moreno, investor relations manager at Banco Santander Chile, estimates a saving of at least 10 basis points on an all-in basis compared to a Chilean peso bond issue, after accounting for the swap of US dollars into the Chilean currency.

“The trigger (to our Australian issue) was the basis swap,” he said on the phone from Santiago.

“At the time, it looked cheap compared to what we could do in our local market.”

Underpinning issuance is demand from yield-hungry Asian private wealth investors with Australian dollars to recycle. With coupons as high as 5.75 percent over a five-year horizon, such kangaroo bonds offer attractive returns compared with US government bonds yielding as little as 3.4 percent over 30 years.

This pocket of investor demand is creating price tensions, helping to bring down borrowing costs and luring new issuers.

“It’s good to see issuers from new regions in our capital markets because it also draws new offshore buyers and the more participants, the more liquidity it brings,” said Greg Stock, a portfolio manager at Perpetual Ltd. which has more than A$5 billion in fixed income.