Sizeable maturities coming in bond market

Bond issuance has not been particularly strong over the year to date, and, with maturities for the year totalling A$72 billion, net issuance for the year could be minimal. As we near the end of October, this outcome is looking more likely.

So far, issuance volume for the month of October has been modest at A$4.3 billion and ranks as the worst month of the year, with the exception of June. There was no public issuance in June, as financial markets went into a tail spin at the prospect that the US Federal Reserve may soon taper off quantitative easing.

However, with two months still to go, minimal net issuance for 2013 is not set in stone.

Upcoming maturities suggest that the run-up to the end of the year could be quite busy.

Then again, this assumes that portfolio allocations to fixed income remain unchanged. The news last week that the Future Fund has cut its allocation to fixed income is not welcome in this respect.

Next year, 2014, will see a record-breaking A$81 billion of corporate bond mature in the domestic market, although this does need to be qualified.

First, 2013 is already set to see the  largest volume of bond maturities in many years, and the market is struggling to replace these. Second, a sizable proportion of the maturing bonds are bonds issued by banks in 2009, some of which have already been refinanced, and there is no guarantee that the remainder will all be refinanced in the domestic market.

This raises the question of whether investment allocations to fixed income will be maintained or fall.

Staying with the assumption that investment allocations will remain unchanged, it is useful to look at upcoming maturities, but the question then is: at what point do maturities drive investor demand for new issues? Is it when maturity dates are near or is it a year earlier, when the bonds are about to be moved into cash portfolios?

The evidence is inconclusive and varies with the differing practices of fixed income portfolio managers.

For example, in the month of October, A$3.7 billion of bonds will mature, and, as noted above, issuance for the month has reached A$4.15 billion so far. Could it be that maturities to come, of A$8.1 billion in October 2014, have influenced this outcome?

In the month of November, A$2.1 million of bonds will mature, and, in November 2014, A$6.1 billion of bonds will fall due. In December, the situation is reversed somewhat, with A$8.3 billion of bonds maturing, but in 2014 only A$6.9 billion will mature.

Another factor that may influence the thinking of fixed income managers is the volume of maturities due in the New Year. In both January and February more than A$10 billion of bonds will mature.