Australian businesses don’t issue many bonds, but that doesn’t worry Reserve Bank deputy governor Phillip Lowe.
Aside from banks, Australian businesses make less use of bonds – tradeable, interest-bearing debt securities – to raise money than their counterparts overseas.
Of that relatively small volume of bonds, a relatively small proportion is issued within Australia, as local corporates that issue bonds prefer to do it in offshore markets.
“Putting all this together, the Australian corporate bond market is relatively small in size and is less well developed than corporate bond markets in a number of other countries,” Dr Lowe said in a speech in Sydney.
The value of non-bank corporate bonds in the domestic market amounts to around $50 billion, only a fraction of total corporate debt of $920 billion, with most lent directly by banks.
In some other economies, strains on banks’ funding costs had made it attractive for businesses to go direct to the bond market, but the number of Australian businesses finding themselves in that position is relatively small, Dr Lowe said.
“By and large, the Australian banking system has been able to meet the financing needs of most of the corporate sector,” he said.
Super funds have only small holding of these bonds, only about $7 billion, or less than one per cent of their assets.
In contrast, they hold about $40 billion of local bank-issued bonds and nearly $60 billion of foreign bonds.
“This suggests that the issue is not so much a lack of appetite for bonds, but rather the relative risk-return and liquidity characteristics of the corporate bonds on offer,” Dr Lowe said.
And while the super funds are not averse to funding non-bank corporates, they prefer to do it by buying equities rather than bonds.
But the corporate bond market is still a good thing to have, Dr Lowe said.
It can be seen as “a form of insurance”, able to provide an alternative source of business finance at times of banking system stress and offer price competition to banks at other times.
“In a perfect world, the market would be deep and liquid at all times, but I don’t think this is required for the market to play this important insurance role,” Dr Lowe said.
But it is necessary to have the general infrastructure that would allow the market to respond when it was needed.
And, although the bond market is a “work in progress”, he said Australia does have the necessary infrastructure.