Australia's bond market is likely to take more lending business away from banks as tighter banking regulations make market-based finance relatively cheaper, a top central banker said on Tuesday.
Reserve Bank of Australia (RBA) Assistant Governor Guy Debelle said corporate bond issuance had already increased markedly, both onshore and abroad, with investors happier to buy lower-rated and longer-term debt.
Australian corporates had sold A$35.1 billion ($33 billion) of paper since the start of 2013 while domestic issuance of debt rated BBB+ to BBB- was the strongest on record.
"While bank-based finance remains dominant today, in the future we may well see the Australian financial system move to more market-based sources of finance, particularly bond issuance," Debelle said in a speech.
Tighter global regulations on banks, including requirements for holding more liquid assets, had raised their cost of funding, he said.
"As a result, market-based sources of finance are now more cost effective for a wider range of companies and one would expect them to respond to this with increased bond issuance."
Debelle noted offshore demand for Australian paper remained strong, with foreigners holding more than 80 percent of outstanding corporate bonds and more than 65 percent of Federal government debt.
The outstanding stock of government debt is expected to swell to more than A$600 billion by 2016-2017, up from less than A$200 billion before the global financial crisis. Yet, Australia is still one of only 13 sovereigns rated triple-A by Standard & Poor's, making its bonds attractive to offshore investors.
"A sizeable share of this demand comes from official reserve managers who are attracted to the relatively higher yield on Australian government bonds, the high and stable credit rating of the Australian government and Australia's strong and stable economic performance," said Debelle.
Even the market for residential mortgage-backed securities (RMBS) was returning to normal after suffering badly in the fallout from the financial crisis.
Total Australian dollar issuance in 2013 was only exceeded by issuance in the two-and-a-half years immediately preceding the onset of the crisis. Debelle estimated around 40 percent of each RMBS sale in 2013 was taken by offshore investors.
"Foreign investor demand for Australian RMBS has been quite high, reflecting the lack of supply of RMBS in foreign markets, the global search for yield, and confidence in the high quality of the underlying collateral of Australian RMBS," he said.
