Maturities, yields push first quarter domestic bond issuance

At the end of 2014 global financial markets were positioning for the first rise in United States interest rates since the onset of the financial crisis, and the beginning of a normalisation of monetary policy. But by the end of January it was apparent that this was not going to occur as fast as markets had anticipated.



Indeed, the move has been pushed into the second half of this year and even that is in doubt. Economic data is proving to be softer than expected and the US Federal Reserve's Federal Open Markets Committee has expressed its willingness to be patient, as it waits for signs of an economic recovery gaining momentum. The FOMC fears that any move to raise interest rates too soon could quickly kill off a nascent recovery.



These factors, combined with the Reserve Bank of Australia cutting the official cash rate by 25 basis points to 2.25 per cent in February, expectations that it will cut again soon and significant corporate bond maturities in Australia and New Zealand in the first quarter resulted in strong issuance volumes in corporate bond and structured finance markets.



March quarter issuance was A$28.9 billion in Australia - not far off the first quarter record of $32.6 billion in 2012 and $31 billion-plus in 2010 and 2011. A new record was set in New Zealand with a first quarter issuance of NZ$5 billion.



Structured finance issuance was more than $11 billion, which is the best since the boom year of 2007.

The on-going search for yield is, of course, part of the story too.

European, North American and Australian credit default swap indices contracted steadily over the quarter, if allowance is made for the rollover at the start of March.


There has been a very clear trend of contraction in Commonwealth and corporate bond yields since the end of 2013. Credit spreads to CGS and swap were widened in the second half of 2014 but have since plateaued and may even be narrowing again.



The trendline for Australian corporate bond issuance shows a clear upward trend over the last 15 months. Could this be a pointer for the rest of the year? The same upward trend has been underway in corporate bond issuance in New Zealand since the end of 2010.



However, true corporate issuance hasn't been a strong part of the first quarter. True corporate issuance accounts for only 8.1 per cent of first quarter issuance in the local market, and only five per cent in New Zealand.

Following the usual seasonal pattern, kangaroo issuance has been strong in the first quarter, running at just under 50 per cent but issuance from entities rated within the 'A' and 'BBB' rating categories has also been strong in the first quarter. This issuance has come almost entirely from domestic and international banks.



Although highlighted within these rating categories are BHP Billiton and Connect East and a A$1.1 billion subordinated debt issue from NAB.



Across the Tasman there was even stronger first quarter kauri issuance, with AAA and AA rating category issuers (the major banks and Auckland City Council) dominating.



The trend towards terms to maturity of five to seven years, or greater than ten years, among SSA (sovereign, supranational and agency) issuers is very apparent. The weighted average maturity of the bonds outstanding has been steadily lengthening over the last 15 months.



In New Zealand the five to seven year term to maturity has been favoured.



The total volume of bonds outstanding in the domestic market has finally cracked the $400 billion mark. In New Zealand outstandings are just shy of NZ$60 billion.