RDP 2012-09: A History of Australian Corporate Bonds 7. Conclusion

This paper examines the development of the Australian corporate bond market over the past century. Today, bond issuance is almost entirely undertaken by private issuers, particularly banks, in contrast to the dominance of government-owned corporations prior to the 1980s. The growing importance of private issuers in the corporate bond market and the wider range of issuers that are able to access funding through the bond market are indicative of the development of Australia's financial markets over the past three decades.

The development of the corporate bond market has been influenced by global economic events and changes in the regulatory landscape. The major regulatory changes have been: the imposition of banking controls following WWII; the deregulation of the banking system and capital account liberalisation during the 1970s and 1980s; and the introduction of mandatory superannuation from the late 1980s.

The banking system regulation and subsequent deregulation, as well as capital account liberalisation, influenced the composition of the issuer base, particularly between banks and non-bank financial institutions. Banks now dominate bond issuance, in contrast to their low share of issuance prior to financial system deregulation.

These regulatory developments, along with the introduction of mandatory superannuation, also led to significant changes in the investor base. Non-residents now account for the largest component of the investor base, while households comprise the smallest share.

The pricing of corporate bonds has varied through the business cycle, with periods of economic and financial distress associated with an increase in both the level and dispersion of spreads relative to other periods. While bond spreads have, on average, been higher for bonds with a lower credit rating, the significant variation in spreads across bonds of the same credit rating suggests that other risk factors, such as the degree of liquidity, are also important.