A raft of Australian investment management companies, including Royal Sun Alliance and Tyndall Australia, are on the verge of using their first domestic interest-rate swaps. Others, such as BT Funds Management, expect to increase their use of the product. Standard bond indices in the region are shifting to include more floating rate paper, making fund managers keen to better manipulate maturity and yields on corporate bonds in their portfolios.
Interest-rate swaps give portfolio managers flexibility, said Stephen Miller, executive v.p., Australia fixed-income at BT Funds Management in Sydney. They can use them to synthetically sell bonds, which is a good workaround for trading in the illiquid Aussie cash markets.
Tyndall Australia, an investment management company with AUD2.5 billion in Australian dollar-denominated fixed-income assets, 30% of which are corporate bonds, is preparing to use domestic currency interest-rate swaps for the first time, said Roger Bridges, portfolio manager, Australia bonds in Sydney. Tyndall expects to use its first interest-rate swap this quarter. The fund manager will soon start talking to potential counterparties, and will target domestic relationship banks first, Bridges said. It will choose counterparties based on their credit-worthiness and pricing.
Royal Sun, with a fixed-income portfolio totaling AUD4.4 billion (USD2.4 billion), 37.8% of which comprises domestic bonds, also plans to use interest-rate swaps, said Simon Walker, fixed-interest fund manager in Sydney. "We're in the process of starting from scratch," he said.
