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The bond market in australia


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The bond market in australia

  1. 1. By- Anil Vishnoi, 769
  2. 2. Introduction  Bonds are defined as debt securities with a maturity at issue of at least 12 months.  This includes debentures (which are typically secured using a fixed or floating charge over a company’s assets), asset-backed bonds and unsecured bonds. Private placements are included where the information is available, while hybrids are excluded. The bonds are recorded at their face value; foreign currency bonds are valued at the Australian dollar equivalent face value, including the costs of swapping foreign currency to Australian dollars at the time of issuance.
  3. 3. Types of Bond market in Australia  The overall bonk market in Australia can be categorised mainly in to two parts :- 1. Government Bond market 2. Corporate Bond market
  4. 4. Development of Australian Bond market  Trends in the growth, size and composition of the bond market over the past century can be broadly grouped into three periods: 1. Up to about 1950 – a period when the bond market was relatively large and mostly comprised of publicly owned issuers. 2. From 1950 to the mid 1980s – a time of transition from publicly owned issuers to private issuers. The bond market was relatively small and the financial sector was heavily regulated over this period 3.From the late 1980s to today – a period of strong growth in the bond market and considerable private issuance.
  5. 5. Australian Corporate Bond Market  The Australian corporate bond market is divided into three categories - 1. Bonds issued by Australian financial institutions, which includes banks (private and non- bank financials.) 2.Bonds issued by Australian non-financial corporations (as well as private corporations, this includes PTEs). 3. Asset-backed securities (ABS) issued by Australian- domiciled special purpose vehicles (SPVs), which include private owned entities.
  6. 6. Up to 1950: Largely Publicly Owned Issuers  The bulk of the issuance by government-owned corporations took place in the 1920s. The proceeds were used mostly to fund public works programs, with state and Australian governments initiating a range of projects following the end of World War I. Half of the bond issuance was by Victorian water and sanitation boards (Melbourne and Metropolitan Board of Works and the Geelong Waterworks and Sewerage Trust).4 During the 1920s, investment by PTEs rose from 2½ per cent to 7 per cent of GDP.
  7. 7. Sizeable bond issuance saw the stock of corporate bonds outstanding rise to a peak of around $1 billion in 1932. The stock of corporate bonds relative to nominal GDP peaked at around 80 per cent in 1933, largely because of the decline in GDP during the Great Depression (of around 30 per cent between 1929 and 1932) . This accounted for just under half of the increase in the ratio of the stock of bonds outstanding to GDP over this three-year period. Over the 1930s and 1940s, the stock of corporate bonds outstanding declined. There was limited bond issuance as governments reallocated resources to finance war-related expenditure and corporations reduced their leverage amid significant uncertainty about the economic and political outlook. The imposition of war-time controls on the banking system also contributed to a lack of bond issuance by banks.
  8. 8. In contrast, there was strong bond issuance by the Australian Government during WWII. Government bond issuance was mostly domestically sourced through ‘war bonds’ that were marketed patriotically to the general population. Households drew down bank deposits, sold shares and took out bank loans to buy war bonds. Households became comfortable buying bonds on the stock exchanges, a legacy that continued over the next few decades as households remained the main investors in corporate bonds. By the end of WWII, the corporate bond market had shrunk to around 18 per cent of GDP.
  9. 9. 1950 to 1980: Regulation and Transition Towards Private Issuers  In line with strong economic growth during the 1950s and 1960s, the stock of corporate bonds outstanding increased at a rapid average annual growth rate of 12 per cent. However, this was from a low base and the corporate bond market remained relatively small at less than 10 per cent of GDP. At the same time, the corporate bond market began to shift towards a larger share of private issuance.  The share of corporate bonds outstanding that were issued by publicly owned entities fell from over 80 per cent to around 40 per cent over this period
  10. 10. The shift toward private bond issuance largely reflected two factors: 1. The need to fund an increase in private investment, in particular mining investment. Private investment rose from 10 per cent of GDP to 17 per cent of GDP over the 1950s and 1960s. This was in an environment of strong domestic 10 and international economic growth, with ongoing industrialisation and urbanisation in Australia and its major trading partners (particularly Japan). 2. Corporations seeking to increase gearing from pre-war levels. For much of this period, banks’ ability to lend to corporations was constrained by banking regulations, which originated from the imposition of war-time controls. As a result, an increasing proportion of corporate investment was financed through the issuance of bonds, as well as intermediated through non-bank financial institutions (NBFIs). NBFIs’ share of total financial institutions’ assets had increased from 10 per cent prior to introduction of the war-time banking controls to around 36 per cent by the end of the period of banking controls. NBFIs’ share of the bond issuer base also increased from 2 per cent in 1950 to around a quarter in 1960. In contrast, banks accounted for less than 10 per cent of the issuer base prior to the 1980s, and only 3 per cent during the period of regulation.
  11. 11. 1980s to Today: Deregulation and Capital Account Liberalisation  The stock of corporate bonds outstanding has increased significantly over the past 30 years, with the market now equivalent to around 62 per cent of GDP. At the same time, there has been an increase in the diversity of issuers (especially by credit rating), a sectoral shift in the issuer base from non-financial corporations to banks, and increased utilisation of offshore bond markets. The deregulation of the banking system in the 1980s and the floating of the exchange rate and abolition of capital controls in 1983 contributed to these changes. The removal of capital controls and the introduction of compulsory superannuation have also driven changes in the composition of the investor base, with holdings by non-residents and institutional investors largely replacing direct holdings by households.
  12. 12. Australian Govt. Bond Market  The Government bond market in Australia can be categorised in to two parts:- 1.Bond issued by Commonwealth government, 2.Bond issued by State/Territory governments
  13. 13. Commonwealth Government Securities  Commonwealth Government Securities (CGS) includes all debt issued by the Commonwealth. The Commonwealth currently uses three debt instruments: Treasury Fixed Coupon Bonds, Treasury Indexed Bonds and Treasury Notes  Gross outstanding CGS has fallen from a peak of around $106 billion in 1997 to around $62 billion. Treasury Fixed Coupon Bonds outstanding are around $50 billion. To date the Government has managed this reduction while maintaining the viability of the CGS market and its supporting infrastructure.
  14. 14. Treasury Fixed Coupon Bonds Treasury Fixed Coupon Bonds account for around 80 per cent of CGS outstanding. With these securities: the face value or capital value is repaid at maturity; holders receive coupons semi-annually; and trade is on the basis of yield to maturity. There are 11 benchmark securities that have a range of maturities extending to April 2015. The average volume outstanding in these key benchmark securities is close to $5 billion. The Government has weighted recent issuance towards securities with an initial term to maturity of between 11 and 13 years. This weighting towards the long end of the yield curve helps maintain the length of the Commonwealth yield curve. This financial year, the Government is expected to concentrate issuance in the April 2015 security. Issuance of relatively longer dated securities reflects the Government's comparative advantage in borrowing for longer periods. The Commonwealth is the highest rated issuer in the country, and all major rating agencies give it the highest possible rating. This reflects the Government's capacity to raise taxes to service debt funding needs.
  15. 15. Treasury Indexed Bonds Treasury Indexed Bonds guarantee holders of these securities a real rate of return. The coupon and capital for these securities is linked to a measure of inflation (Consumer Price Index). The volume of these securities outstanding is currently $6.4 billion or around 10 per cent of total outstanding CGS. Treasury Notes Treasury Notes are the third form of CGS the Government currently issues. Treasury Notes are short-term securities that assist in managing the Government's within- year funding requirement. This within-year funding requirement arises because the timing of the Commonwealth's revenue does not exactly match the expenditure profile. The Government also uses short-term deposits to assist in managing the within-year funding requirement. When the Commonwealth has surplus funds, it places these funds on deposit with the Reserve Bank of Australia (RBA). The deposits earn a rate of return broadly similar to interest paid on Treasury Notes.
  16. 16. Investors in Commonwealth Government Securities A wide range of domestic and international investors hold CGS. The Australian market has a relatively high level of non-resident participation with holdings ranging from 30 to 40 per cent in recent years (Australian Bureau of Statistics, 2002a). This position has changed significantly in the past 20 years. Previously, the market was heavily oriented towards a domestic investor base, with explicit prohibitions on the capacity of non-residents to invest in CGS. Banks and financial intermediaries hold around 10 per cent of outstanding CGS for purposes including meeting prudential requirements, holding an inventory of stock to assist trading, and hedging market risks associated with various transactions. Pension funds hold around 20 per cent of outstanding CGS as a low risk long- term asset to match against their long-term liabilities. Similarly, insurance companies hold around 20 per cent to invest premiums in long-term assets to match the likely maturity of their policies. The RBA has historically held around 15 per cent of outstanding CGS to facilitate its open market operations to implement monetary policy and contribute to financial system stability. In recent years, the RBA has reduced its reliance on outright purchases of CGS to implement monetary policy.
  17. 17.  State and Territory government bonds account for around $48.5 billion, or 31 per cent, of total fixed coupon bonds outstanding. The dominant issuers are New South Wales, Victoria and Queensland. In each State and Territory, a central borrowing authority (CBA) borrows on behalf of relevant government public sector authorities and entities. Centralising the funding needs of these borrowers provides a more efficient source of funding than if each entity individually sourced funds.  CBAs use a range of funding instruments but fixed coupon bonds tend to be the primary security issued. The combination of all State and Territory bonds outstanding broadly matches the maturity profile of outstanding Commonwealth bonds. There is around $4 billion of State and Territory bonds that will mature in each financial year extending for a period of around ten years State and Territory government bonds
  18. 18. Thank You