Aussie banks issue more bonds with local funds now the main domestic buyer
Bank funding is relying more on bank bonds and local investment and pension funds have grown in importance as buyers of these bonds.
Australia’s corporate bond market has long been dominated by banks, where the bank bond market punches above its weight, with the bonds issued by all Australian financial companies now similar in size to Japan’s market and not far behind Germany according to the OECD.
Moreover, the market has grown in importance over recent years, with banks issuing more bonds both relative to history and other countries.
Bank funding is still dominated by deposits, but increased issuance means local banks have relied more on bank bonds lately at the expense of short-term debt/loans and equity.
For example, over the past year, bank deposits accounted for almost 85% of bank funding. Net issuance of bonds accounted for almost one-third of funding as short-term debt/loans went backwards by about 10% and equities dropped 5%.
The recent reliance on bank bonds is the greatest in years, with banks at first skewing issuance to domestic bonds and more recently to overseas bonds.
The declining importance of short-term debt/loans initially reflected the end of the RBA’s COVID-era Term Funding Facility loans made to banks, but lately it is because banks have reduced their reliance on one short-term debt.
As an aside on deposits, it should be remembered that most deposits are (electronically) created when a bank writes a loan to either a household or company and the bank just credits the amount of the loan to the borrower's bank account (and by the same token, deposits are extinguished when a loan is repaid).
Households and corporates naturally dominate, accounting for about 50% and 20% of total deposits, respectively, but pension funds and overseas investors each account for close to 10%, and government and investment funds each hold almost 5%.
As for who is buying bank bonds, overseas investors continue to dominate the market, with a roughly 70%/30% overseas/domestic split of investor holdings of bonds outstanding.
Interestingly, overseas investors have switched out of overseas-issued bonds in favour of locally issued ones, while domestic holdings have fallen modestly and are back at pre-COVID levels.
Within the domestic investor base there has been significant change over recent years.
Investment funds have grown in importance and they are now narrowly the main domestic holder of locally-issued bank bonds, accounting for about 8% of the entire bank bond market, eclipsed only by overseas investors who own domestically-issued bonds equal to about 16% of total outstandings.
The same is true for pension funds, which have also grown in importance and now hold around 5% of the total market, approaching the increased 6% share of other domestic investors (mainly insurers and corporations).
Meanwhile, bank holdings of bank bonds have fallen sharply since the height of COVID and are currently about 8% of the market. RBA holdings – where bonds can be counted as collateral for repurchase agreements – have shrunk to 1%.
Finally, government – which is mainly state issuers – hold 3% of all outstanding bank bonds.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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