In a speech to the Economic Society of Australia in Canberra yesterday, Reserve Bank of Australia (RBA) assistant governor for financial markets Guy Debelle said better conditions in global financial markets and easing European sovereign debt concerns have spurred the recovery.
“Issuance has been generally strong and has been met by robust domestic and offshore demand,” said Mr Debelle.
“The only exception to this was the month of June, which saw virtually no issuance of non-government bonds as issuers and investors stood on the sidelines while financial markets were assessing the prospects and implications of the start of the US Federal Reserve’s tapering to its asset purchases program,” he said.
But that episode proved to be short lived, he said – with Australian and global bond market activity resuming quickly and “continuing apace” when the Fed began tapering in December.
“The past year in the Australian bond market has been most notable for the signs of improvement in investor sentiment extending along the risk spectrum towards lower rated corporate bonds and to parts of the fixed income market that have been, unfairly, at least in the case of Australia, tarred by the loss of global investor confidence,” said Mr Debelle.
Issuance in the domestic market of lower rated corporate bonds – that is, those rated BBB+ to BBB- – was the “strongest on record”, he said.
“The securitisations market, particularly for residential mortgage-backed securities, also recorded a significant increase in activity,” said Mr Debelle.
Looking forward, the RBA expects the normalisation of the Australian bond market to “solidify”, he said.
“Credit spreads are likely to remain higher than their pre-crisis levels, reflecting the repricing of credit and liquidity risk, while yields are likely to remain low for some time as central banks only gradually normalise their monetary policy settings,” said Mr Debelle.
“We are likely to see some further growth in the size of the public sector bond market in Australia for a little while longer, but the stock of outstanding bonds is expected to stabilise as a share of GDP by mid-2017,” he said.
“Issuance by the Australian banks is likely to remain subdued as they continue to favour deposit funding,” said Mr Debelle.
The Australian financial system, and particularly bond issuance, could be moving towards more market-based sources of finance in the future, he said.
“The regulatory changes have increased the relative cost of bank intermediation, as liquidity is now more appropriately priced and the cost of maturity transformation has increased,” said Mr Debelle.
“As a result, market-based sources of finance are now more cost effective for a wider range of companies and one would expect them to respond to this with increased bond issuance,” he said.
