The Non-Government Bond Market In Australia Has Grown Exponentially In The Last Decade. What Factors Do You Think Contributed To This Phenomenon?
The non-government bond or corporate bond market is considered as the fastest-growing investment market in Australia. As a matter of fact, the non-government bond market already issued A billion in 1999 (AllBusiness, 1999). This shows a great increase of 28%. During that time, the non-government bond market is being affected by the strong growth of asset-backed bonds and non-asset-backed bonds which resulted to the share of asset-backed bonds in total outstanding remaining of about 40%. On the other hand, the non-asset-backed issuers comprise of financial companies, particularly banks, non-financial companies as well as non-resident entities, where in each of which is currently account for about 20% of non-government bonds outstanding (Financial Stability Review, 2004). The said number had continually increased up to the current time. In 2006, according to the report of Reuters, the total non-government bond market of Australia had been able to issue A0 billion, showing a great increase and development way back 1999. In 2007, it has been reported that the said industry issued A5 billion.
There are different factors which affected the growth and development of non-government bonds in the country. One of these is the growing enthusiasm of Australian borrowers for issuing bonds offshore. According to the Ric Battelino (2002) the RBA governor of the Reserve Bank Bulletin, assistant, the primary reason behind this enthusiasm is because, offshore issues: offer access to a broader range of investors than do the domestic issues; are more likely to be in the own currency of the investor which give the investor an exposure to the Australian credit but not to the risk of currency in the country; offer a vital method of diversification in funding sources for financial intermediaries; and the market appear has the ability to handle large issues that are connected to the greater diversity of credit quality (cited in Carew, 2007). The total amount of non-government bonds outstanding had increased to A0 billion by mid of 2006 from A0 billion in 2000. Offshore issues have accounted for 67% of this increase (Market Analysis section, 2006).
In addition, the growth of non-government bond is due in part to reduction of government bond issues of the country (Australian Bureau of Statistics, 2005). Thus, the fall in the supply of government bonds on issues, together with the increasing demand from funds under management, particularly the superannuation funds caused the strong growth in repurchase market as well as the non-government bond market. In 1999, the commonwealth government bonds on issues fell from A billion in 1996/1997 to A billion. In connection, the state government bond on issues fell from A billion in 1994/1995 to A billion in 1999, which accompanied by a fall in turnover in the OTC market for government debt securities from A,387 billion in 1996 – 1997 to A,054 billion of the previous 2 years (Grose, 2001). With the decreasing availability of government bonds, corporate bonds or non-government bonds were being favored as the best alternative in fixed income securities which helped to lower the cost of borrowing for corporate borrowers, at the same time, helped to increase the attractiveness of Australian denominated debt for non-resident issuers (Australian Bureau of Statistics, 2005).
Another important factor that contributed to the growth of non-government bond market in the country is the increase in non-resident bond issuers or known as the Kangaroo bonds. Kangaroo bonds issued had increased from A.8 billion in 2002 – 2003 to A.2 billion in 2003 – 2004. In 2004 – 2005, the non-resident borrowers that entered the bond market with A.4 billion in issues, where in about .8 billion or 70% were taken up by residents (Australian Bureau of Statistics, 2005).
Growth in the non-government bond and note market is dependent on a stable and solid flow of top-name issuers of the paper offering investors with securities providing sufficient credit-rating, liquidity and marketability. With around billion in new bonds issues in 2004, non-government market had reached its maturity. Yet, its credit profile remained strenuous, with more or less 84% of turnover in the secondary market in corporate bonds rated A+ or above. At the same time, the presence of dependable and consistent non-government bond indices had helped to strengthen and support the credibility of the market and assist superannuation and other investment funds whose fixed-income investment strategies are index-driven (Carew, 2007). Based on these, it can be said that the performance of non-government bond will continue to increase.
AllBusiness (1999, November 30). ASX launches bond trading screen. Retrieved September 17, 2009, from: AllBusiness: http://www.allbusiness.com/banking-finance/financial-markets-investing/8173706-1.html
Australian Bureau of Statistics (2005). Year book, Australia, Issue 87. Australian Bureau of Statistics.
Carew, E. (2007). National market, national interest: The drive to unify Australia’s securities markets. Allen & Unwin.
Financial Stability Review (2004). Credit quality in the Australian non-government bond market. Retrieved September 17, 2009, from: RBA: http://www.rba.gov.au/PublicationsAndResearch/FinancialStabilityReview/Mar2004/Pdf/fsr_0304_2.pdf
Grose, C. (2001). ‘Roles of securities laws and securities market regulators for the sound development of bond markets: Australia’. In Organization for Economic Co-operation and Development (Ed.). Bond market development in Asia: Finance and investment (pp. 325 – 332). OECD.
Market Analysis section (2006, August). Australian Banks’ Global Bond Funding. Retrieved September 18, 2009, from International Department: http://184.108.40.206/PublicationsAndResearch/Bulletin/bu_aug06/Pdf/bu_0806_1.pdf