The optimistic outlook for the Australian corporate bonds explained in the preceding article assumes that financial markets generally are entering a recovery phase; but it seems too early to be making that call. It also ignores the fact that 50 per cent of domestic corporate bond issuance for the year to date has been in the form of floating rate notes - in other words investors are very much interested in credit spreads and want to retain them if interest rates rise.In any event, the recent rise in government bond yields and term interest rates may prove to be short lived, as the ANZ economics team argued last week. They believe the worst is yet to come for many parts of the Australian economy and the gloomy annual World Economic Outlook released by the IMF backs that up, for Australia, and the rest of the world.On this basis, the ANZ maintains that Australia's official cash rate will fall to two per cent by the end of this year and will be held there throughout most of 2010. The ANZ believes the RBA will not raise the cash rate until unemployment stops rising and evidence of a sustained economic recovery is mounting. At the same time, it will be long-term yields that will absorb the impact of increased government bond issuance globally. The ANZ expects to see a noticeable steepening in the 3/10 curve. The low cash rate, poor economic conditions and a return of investor risk aversion will keep the pressure off the three-year end of the curve.If the ANZ is right, this scenario is unlikely to encourage any rebound in the corporate bond market. The market will continue to be dominated by government guaranteed bank bond issuance and may be overwhelmed by government and government-guaranteed state government bond issuance. Retail bond issuance may continue to be the only option for any corporate that must issue.However, there is also a longer term structural issue that has driven global corporate bond markets, as well as Australia's, over the better part of the last two decades. This may or may not be addressed as the GFC is resolved.Bond issuance by non-financial corporations has struggled as banks and other financial institutions have increasingly relied on bond markets for funding and relied less on deposits. This trend accelerated from 2003 with the emergence of abundant liquidity and the consequent sharp contraction in credit spreads. At the end of 2008, financial institutions accounted for 84 per cent of bonds outstanding in the United States, up from 68 per cent at the end of 1989. In Europe the figures were 91 per cent and 85 per cent, respectively. To the extent that they are available, figures for the United Kingdom and Australia are similar. This is unlikely to change as long as households remain net spenders rather than savers. Moreover, institutionalised saving as it exists in Australia will not help, in this respect.