15 Apr 2014
RBA Debelle speech: Australian yields likely to remain low for some time
FXStreet (Bali) - Guy Debelle, Assistant Governor (Financial Markets) at the RBA, gave a speech to the Economic Society of Australia in Canberra today, with the conclusions of his presentation, titled, 'The Australian Bond Market', presented below.
Conclusions (prepared speech)
Although Australia avoided most of the more severe disruptions in financial markets during the global financial crisis, the turmoil has left its mark on the Australian bond market landscape. Conditions in financial markets have been improving steadily since mid 2012; 2013 and the first quarter of this year have resembled what normal bond market conditions may look like in a post crisis world. Looking forward, we can expect the Australian bond market to solidify this normalisation. 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.
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. Issuance by the Australian banks is likely to remain subdued as they continue to favour deposit funding.
Total corporate bond issuance may remain subdued in the near term as the main potential issuers – the large diversified mining companies – have a focus on increasing production from already developed projects, containing capital expenditure, and, more broadly, large Australian companies have accumulated significant cash balances since mid 2007.
However, while bank-based finance remains dominant today, in the future we may well see the Australian financial system move to more market-based sources of finance, particularly bond issuance. 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. 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.
At the moment, parts of the corporate sector can access the bond market at a cheaper price than banks can. As mentioned earlier, there has been increased appetite for debt issued by lower-rated companies at attractive prices for the issuer and at longer maturities than they would normally get from a bank. How much of this is a function of the current global interest rate environment remains to be seen, but there is a reasonable prospect that some of these developments will be long-lasting.
Conclusions (prepared speech)
Although Australia avoided most of the more severe disruptions in financial markets during the global financial crisis, the turmoil has left its mark on the Australian bond market landscape. Conditions in financial markets have been improving steadily since mid 2012; 2013 and the first quarter of this year have resembled what normal bond market conditions may look like in a post crisis world. Looking forward, we can expect the Australian bond market to solidify this normalisation. 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.
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. Issuance by the Australian banks is likely to remain subdued as they continue to favour deposit funding.
Total corporate bond issuance may remain subdued in the near term as the main potential issuers – the large diversified mining companies – have a focus on increasing production from already developed projects, containing capital expenditure, and, more broadly, large Australian companies have accumulated significant cash balances since mid 2007.
However, while bank-based finance remains dominant today, in the future we may well see the Australian financial system move to more market-based sources of finance, particularly bond issuance. 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. 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.
At the moment, parts of the corporate sector can access the bond market at a cheaper price than banks can. As mentioned earlier, there has been increased appetite for debt issued by lower-rated companies at attractive prices for the issuer and at longer maturities than they would normally get from a bank. How much of this is a function of the current global interest rate environment remains to be seen, but there is a reasonable prospect that some of these developments will be long-lasting.