Domestic bond market tires in September
At the end of the third quarter of what can only be described as a momentous year for global financial markets - for worse and for better - it seems appropriate to look at the performance of relevant markets so far, and before we get into the final quarter.The domestic corporate bond market is looking distinctly tired. There has been no issuance for the last two weeks and the total for the month of September comes to only A$6.5 billion. But this needs to be put into the context of more than A$35 billion of issuance in the three months prior. As a result, 2009 is already a record-breaking year with issuance exceeding A$76 billion - well ahead of the 2006 annual record of more than A$62 billion. Of course, if it wasn't for the provision of a Commonwealth government guarantee for ADI issuance, the market may not even have got started. Guaranteed bank issuance dominated the first quarter of the year with Australia Post and Colonial Finance being the only non-bank issuers. Commonwealth Bank was the only non-guaranteed bank issuer during the same period, but raised just A$400 million. However, non-guaranteed domestic bank issuance took off in the second quarter with 93 per cent of total bank issuance of A$2.9 billion in April being in this form. In May, 100 per cent of domestic bank issuance of A$3.2 billion was without a government guarantee. But then in June, July and August the proportion of non-guaranteed issuance fell to 61 per cent, 49 per cent and 69 per cent, respectively, as the banks endeavoured to meet all investor demands. In September, the proportion of non-guaranteed issuance has increased again to 76 per cent.At the start of the year issuance with a government guarantee was expensive. Including the 70 basis points guarantee fee, issuance for three years by one of the four major banks came with a credit spread of around 155 bps and 175 bps for five-year issuance. The credit spread for five-year issuance has now contracted to 96 bps and while no three-year issuance has been seen since June, it is safe to assume that three-year issuance could be undertaken for at least 20 bps less than five-year issuance.At three-quarter time the domestic banks still account for 54 per cent of total issuance, while local operations of international banks account for 27 per cent and supranational and agency issuance 15 per cent. True corporate issuance accounts for the remainder, which is better than no issuance at all in 2008.Corporate bond issuance in New Zealand has been steady throughout the year but the September total is modest, at NZ$615 million. The year-to-date total is NZ$7.6 billion, which leaves the market with a way to go to beat last year's record issuance of NZ$10.6 billion.The domestic banks account for only 36 per cent of the year-to-date total, with government guaranteed issuance accounting for just over half of this. Kauri issuance accounts for 17 per cent of the year-to-date total, while true