Key Takeaways
- Foreign-issued bonds denominated in Australian dollars.
- Provide AUD funding without currency risk for investors.
- Lower borrowing costs for foreign issuers via swaps.
- Third-largest segment of Australia's bond market.
What is Kangaroos?
Kangaroos, or Kangaroo bonds, are Australian dollar-denominated securities issued in Australia's domestic market by non-resident entities, such as foreign corporations or governments. These bonds allow issuers to raise capital locally while providing Australian investors exposure to foreign credit risk without currency risk.
Issued exclusively in Australian dollars (AUD), Kangaroo bonds represent a significant segment of Australia's bond market, ranking just behind government and semi-government bonds in size and liquidity.
Key Characteristics
Kangaroo bonds have distinct features that differentiate them from other foreign bonds:
- Currency: Denominated in AUD, eliminating currency risk for local investors.
- Issuers: Typically foreign corporations, financial institutions, or supranational agencies issuing into the Australian market.
- Market Access: Provides foreign issuers access to a deep and liquid funding market, often with lower borrowing costs.
- Tenors and Rates: Usually multi-tranche with maturities from 4 to 10 years, paying rates linked to benchmarks like BBSW plus a spread.
- Liquidity: Traded on secondary markets, offering investors flexibility similar to domestic bonds.
- Credit Quality: Often rated AAA, reflecting strong creditworthiness and appealing to conservative investors.
How It Works
Foreign issuers raise funds by selling Kangaroo bonds denominated in AUD to Australian investors, who benefit from high-yield fixed income assets without exposure to exchange rate fluctuations. Issuers commonly use cross-currency swaps to convert AUD proceeds back to their home currencies, effectively hedging currency risk and locking in borrowing costs.
This mechanism creates a symbiotic relationship: Australian firms borrowing offshore swap foreign currency into AUD, while Kangaroo bond issuers provide AUD funding at competitive rates. The efficient swap market and attractive Australian yields underpin the appeal of these bonds.
Examples and Use Cases
Kangaroo bonds are widely used by various issuers to diversify funding and by investors seeking AUD-denominated fixed income exposure:
- Supranational Agencies: AAA-rated supranational institutions frequently issue multi-tranche Kangaroo bonds to leverage Australia's favorable funding environment.
- Foreign Banks: Asian and European banks utilize Kangaroo bonds to fund local operations or projects, often swapping proceeds to their home currencies.
- Corporates: Multinational companies issue Kangaroo bonds for AUD funding needs and to tap into Australia's deep pool of fixed income investors.
- Investors: Australian fixed income funds, including those tracking bond ETFs, incorporate Kangaroo bonds to enhance yield and diversification in their portfolios.
- Market Participants: Entities like BND represent diversified bond funds that may include Kangaroo bonds in their holdings to capture global fixed income opportunities.
Important Considerations
While Kangaroo bonds offer attractive benefits, investors should consider issuer credit risk and the impact of cross-currency swaps, which can introduce basis risk if AUD demand shifts. The market size, though significant in Australia, remains smaller compared to other global bond markets.
Understanding the J-curve effect and the nature of the issuer's obligations can help you evaluate potential risks and returns more effectively when investing in these foreign-issued securities.
Final Words
Kangaroo bonds offer a strategic way for foreign issuers to tap into Australia's stable AUD market while providing investors with currency risk-free exposure. Keep an eye on interest rate trends and issuer credit quality to identify attractive opportunities in this segment.
Frequently Asked Questions
Kangaroo bonds are Australian dollar-denominated bonds issued in Australia's domestic market by foreign entities like corporations or governments. They allow these issuers to raise capital locally while providing Australian investors with high-yield, AUD-denominated assets without currency risk.
Kangaroo bonds are issued by non-resident entities such as foreign banks, corporations, and supranational agencies. Issuers use them to diversify funding sources, access Australia's deep bond market, and often benefit from lower borrowing costs when Australian dollar interest rates are favorable.
Australian investors benefit from Kangaroo bonds by gaining access to high-yield, Australian dollar-denominated fixed income assets without facing currency risk. These bonds also offer deep liquidity and are an attractive option following the phase-out of hybrid bonds.
Foreign issuers typically hedge currency risk by swapping the Australian dollar proceeds back into their home currency using cross-currency swaps. This strategy protects them from exchange rate fluctuations on both coupon payments and principal repayments.
Kangaroo bonds represent the third-largest segment of Australia's bond market after government and semi-government bonds. They support the Australian dollar's status as a funding currency and enhance the efficiency of cross-currency swap markets.
Since the early 2000s, Kangaroo bond issuance has grown significantly, with a notable recovery after the global financial crisis. In 2025, issuance surged due to attractive yields, Reserve Bank of Australia rate cuts, and strong demand from supranational agencies, banks, and corporates.
For example, a European bank might issue a 1 billion AUD Kangaroo bond at a fixed rate, swap the Australian dollars to euros for project funding, and hedge repayments through currency swaps. Australian investors buy the bond to gain AUD exposure without currency risk.
