Briefly introduce the main development of Australia's bond market during the GFC (2 marks). Explain the reasons for the structural change about the Australia's bond market (2 marks). Explain the reasons for the increasing spreads of Australian bonds (2 marks). Explain the reasons for the shortened maturity of Australia's bonds (2 marks). Explain the reasons for the improvement of the credit quality of Australia's bonds (2 marks).
Overview
The global financial crisis has significantly negative influence on the financial markets all over the world. In addition, the global financial crisis will also do great harm to the development of the bond market. As one of the developed countries, Australia also suffers from the global financial crisis. Hence it is useful to analyze the reasons for the main development in Australia's bond market during the global financial crisis to acquire with the influence of the global financial crisis on Australia's bond market.
Essay
The main development of Australia's bond market can be seen as follows. Firstly, the structure of Australia's bond market has changed greatly during GFC (global financial crisis). The issuance of banks' bond has increased rapidly from mid 2007 to mid 2009, while the issuance of corporate bonds and ABS (assists-based securities) gradually decreased (Black, Brassil and Hack, June 2010). It can be seen in figure 1.1. The issuance of financial bonds increased by more than 15% from mid 2007 to mid 2009; while the issuance of assets-based securities decreased by about 15% during GFC.
Figure 1.1 Australian non-government bonds outstanding (Sources: Black, Brassil and Hack, June 2010)
Secondly, spreads of Australian bonds increased during GFC. For example, the spreads of the BBB-rated corporate bonds in Australia reach as high as at 560 basis points during GFC (Black, Brassil and Hack, June 2010). In addition, the bond maturity gradually shortened from mid 2007 to mid 2009. For example, a large number of the short-term bonds will issued by Australian Banks. It can be seen in figure 1.2.
Figure 1.2 Australian non-government bonds issuance (Sources: Black, Brassil and Hack, June 2010)
According to figure 1.2, issuance of the short term bonds increased from 8% to 25% during GFC; while issuance of the long term bonds decreased from 65% to 40% GFC.
Finally, the credit quality was improved slightly during GFS. The percentage of AAA-rated and AA-rated bonds increased slightly during the global financial crisis. The following parts will respectively interpret this main development in Australia's bond market.
Based on the analysis above, the following parts will explain the reasons for the main development.
Firstly, the global financial crisis results in the reevaluation about the risks of the assists-based securities. It will significantly affect the Australia's bond market. Outbreak of the global financial crisis will not only result in the chaos in global financial markets, but also lead to the waver of investors' confidence. The investors' appetite for high-risk bond products gradually receded (Black, Kirkwood and Ldil, 2009). Hence the investors will decrease the needs for the products about the assists-based securities. In addition, Australian banks issue a large number of financial bonds in the capital market for the following reasons. On one hand, Australian banks still own relatively high profitability and nice balance sheet during the global financial crisis. Hence the Australian banks are rated relatively high. Hence the investors can accept the highly rated financial bonds of Australian banks. On the other hand, concern about the global financial crisis also results in the financing of the Australian banks to face up with the difficulties in the global financial crisis. What's more, the corporations have difficulty to financing in the bonds market; the corporate needs for funding in Australian banks increased (Brownet al, 2010). Hence Australian banks also need to issue the bonds to collect money in the capital market to provide funds for the corporations and face up with the global financial crisis. Besides, Australian government's guarantee for a fee will be beneficiary for the banks to issue large quantities of banks bonds. Thus, the assists-based securities decreased and banks bonds increased during the global financial crisis in Australia.
Secondly, the reasons for the increasing spreads of Australian bonds can be seen in the following aspects. On one hand, the global financial crisis due to US sub-prime crisis makes the investors aware of the risks about the bonds investment. Hence the investors will require the high return for the bonds investment. On the other hand, the risk aversion decreases the investors' need for the Australian bonds (especially the lowly-rated bonds). For example, several corporate bonds have no access to the Australian bonds market. Hence the increasing investment needs for bonds investment will require the high return. However, the financing needs of corporations increased during the global financial crisis to do with the financial distress (Brownet al, 2010). In addition, the global financial crisis do great harm to the financial system and decrease the capital supply of the financial market. Thus, the spreads of the Australian bonds will increase during the global financial crisis. For example, in Australia, the 3-year major banks' major unguaranteed bonds reached as high as 225 basis points during the global financial crisis (Black, Brassil and Hack, June 2010).
Thirdly, the reasons for the shortened maturity in the global financial crisis will focus on the following aspects. In the beginning, the global financial crisis will give rise to the uncertain environment, which means the unexpected risks to the investors (Brownet al, 2010). Hence issuing the long term bonds will increase the uncertainty and concern of the bonds investment. Hence, the investors tend to invest the short term bonds. In addition, the global financial crisis raise the costs of bonds financing; issuing the long term bonds will be harmful to increase the operation costs of the enterprises. For example, the spreads of Australian bonds increases rapidly during the global financial crisis. Hence several corporations are willing to issue the short term to reduce the financing costs.
Finally, the slight improvement about the credit quality of Australian bonds mainly focuses on the stable domestic economy and limited rating variation about Australian bonds. The global financial crisis has negative impact on the financial markets and investment environment. Hence several corporations suffered from the financial troubles. However, Australian financial institutions also own the good balance sheet during the global financial crisis. In addition, Australian government declared to provide guarantees for the bonds issued in Australia for a fee; the guarantees will be beneficiary to improve the credit quality of Australian bonds (Schwartz, 2010). In addition, the stable economic development will also result in the improvement about the credit quality of Australian bonds. Besides, compared with the downgrading rating about the bonds, the rating about Australian bonds changed slightly. Hence it will improve the confidence of the investors and improve the credit quality of Australian bonds.
Conclusions
The stable economic growth, lacking of confidence about the bonds investment, government guarantee, risk aversion and concern about the uncertain environment in the global financial crisis will result in the main development in Australia's bond market during the GFC.
