The growth in bond issues in Australia Essay
The growth in bond issues in Australia
The stock of Commonwealth Government Securities rose rapidly in 1990 and peaked in 1997 and it the fell existed and continued till 2003. If the fall continued it would be harmful to the financial market and hence the government announced the it would maintain the viability of the CGS market. At present the value of such bonds exceeds $300 billion. The bonds in Australia in the market represented by Non-CGS and Semi issuance. The Stock of such $300 billion, which is more than 3 times of stock of CGS and Semis. In Australia, the government and non-government sectors issuing the bonds in order to raise the capital.
The investors domestic or offshore markets are attracted with the issue of bonds, since the bonds provide secured amount with regular coupon payment for entire life of the bond. The minimum investment in bond is $500,000. For the domestic issue, the commonwealth bank was ranked in number one in the issue of bonds for 2004. It offered fixed and floating rate debt securities. GOVERNMENT During 1990s, the domestic market confined to government borrowers. There is a trend to issue of bonds by financial and non-financial borrowers occasionally issued the bonds into the domestic market only.
But since past decade, the corporate bond market in Australia expanded rapidly. The non-government bonds equivalent to 25% GDP. Due to such increase the government bond outstanding fallen. It is an automatic incident since the non-government bonds increasing rapidly as they are capturing the offshore market. During 1990 the Australian government issued the bonds less than $50 billion and even up to 2005 it was continued with $50 billion. During 1995 to 1999 the bond issue was gone up to $100 billion. But the government want to be stable the issue of the bonds and to maintain $50 billion.
It is a good sign to the government’s view because the issue of bonds indicates the debt ness of the organization. Due to stability of the issue of the bonds, the image of the government will be increased. STATE GOVERNMENTS In Australia, the State Governments also issuing the bonds and they are also mainlining the Australian government’s policy by maintaining that the debt issue i. e. bonds issue should not be more than $50 AUD billions. Since it is the government policy, they cannot issue more than $50 billion. The state government issues bonds called as Semi Government bonds.
These are issued via State governments other than Federal Government. The credit rating varies for every state and hence normally there may be higher rate than commonwealth Government bonds. NON-GOVERNMENT BONDS The banks started to provide more housing loans and it reflected to fall mortgage rates due to lower inflation and increased competition. Of course due to good economic conditions. The banks also diversified its funds to other markets through the local and offshore issuance of bonds and asset-backed securities.
With this effect, the non financial corporate increased their borrowing from banks, besides issue of their own bonds. Issue of bonds in such small country leads to beneficial, shift to low inflation and caused to issue of demand for fixed interest bonds. Issue of non-government bonds can be termed as Australian private sector. The issue of such bonds relates to domestic and offshore market. The private is institutions represented by financial institutions, predominant banks. They issued the bonds into offshore markets more than 80% of their total bonds.
The issue of bonds in offshore market is rapidly developed from 1990 and at present the outstanding is $350 billions whereas the domestic market i. e. onshore market captures only $200 billion. KANGAROO BONDS It is an Australian dollar-denominated bond issued by a non-Australian entity in the Australian market. It is a bond issued by the foreign entity in Australia. The Kangaroo bonds are also long term debt security issued by the non-residents in the Australian domestic market. Kangaroo bonds play the major role in non-government bond market.
During 2003-2004, with the issue of kangaroo bonds, the level of non-government bonds raised from $1. 8 billion to $15. 2 billion. Almost most of 70 percent of this amount contributed by the residents of Australia. The main reason for such contribution in Kangaroo bonds is since the government of Australia reduced the debt security. During that time the government has budget surpluses. Moreover the Australian government encouraged the privatization of some of public departments, which caused the privatization proceeds received. The most of the privatization proceeds and budget surpluses used for repaying the debt.
Therefore government stopped to issue the bonds. Under this juncture, the kangaroo bonds were released and rapid growth is inevitable for kangaroo bonds. During that period, since there is other alternative, as the government is not issuing the bonds and highly credit rating given for Kangaroo bonds, Australian investors supposed to get Kangaroo bonds. FLOW OF FUNDS The non-government bonds increased significantly while the Treasury bonds declined. The Flow of funds represented by the non-government bonds, State Government and Commonwealth Government.
The importance of bonds credibly increased since 1990 and the Commonwealth Government maintained such level, which is not, exceeded more than 60 billion dollars. The bond category increased since the bonds between money market securities and shares with strong guarantee, though it provides lower yield. Hence the flow of funds in the Australia rapidly increased with the cause of issue of bond securities. Since the investors seeking to avoid the losses of share prices, they shifted their platform to the bonds category. CONCLUSION
Since the Australian government maintaining such policy not to issue more than $50 billion, it is inevitable to the other institutions to issue the bonds to get the funds. The domestic market is not having such funds, naturally the financial institutions, banks and other companies started to get the funds through offshore markets by issuing of funds. Due to increase of role by the non-government sector, the government bond out standings fallen as the budget surpluses available to both Central and State Governments. Consequently the role of non-government bonds has increased to become large segment in the Australian bond market.