Underdeveloped corporate bond market a negative for forum

The Australian Financial Centre Forum, established by the Commonwealth government in September 2008, delivered its report to the government Friday week ago. In accordance with the forum's brief, the report focuses on positioning Australia as a leading financial services centre in the Asia-Pacific region.

The report received largely favourable coverage in the mainstream media but apparently has met with only a lukewarm reception from the Cabinet.

No doubt there will continue to be much debate over what is required to achieve this objective but the predictions of Standard & Poor's chief economist, David Wyss, that the headquarters of the global financial system will shift to the Asian region over the next decade or so, will add to the imperative.
 
What was not so well covered were the Forum's comments on the domestic corporate bond market.

The Forum's report noted that the market is not very liquid or deep and is dominated by bank issuance, with an average term to maturity of just 2.5 years. The report describes the corporate bond market as underdeveloped.

The Forum observes that many of the reasons for this situation are structural in nature, and perhaps the most important reason is that the large Australian banks have provided a significant portion of corporate Australia's borrowing needs.

While the maturity of banks' loans is often significantly shorter than borrowers would like, the report noted that "competition between banks for lending to the corporate sector … has kept spreads on bank lending to the corporate sector typically lower than spreads on directly issued corporate paper."

The other structural issues that the Forum identified were ease of access to the corporate bond markets of the US and Europe, at least for some corporate borrowers; the low asset allocation to fixed income in Australia, along with fund managers' need for liquidity; and the tendency for some larger fund managers to look offshore for their corporate credit exposures.

This, of course, raises the question: what need is there for a corporate bond market?

The Forum took the view that a diversified and liquid corporate bond market is necessary if Australia is to offer the range of financial products and services that will allow it to develop into a leading financial centre.