Benefits of bonds: predictable income and capital security
ASX scheme to provide research and listing for up to 70 bond issues.
If a teenager asks you what the sharemarket is, you would answer that it is a market in which shares in companies are traded. Typically this trading is conducted through a stock exchange, in our case ASX.
You would then point to the financial pages of a daily newspaper and say here are the prices and trading details of shares listed on ASX.
But if asked what the bond market is, what would you say?
Where would you look in the financial pages of the daily newspaper to find the trading details of bonds, and would you find anything on bonds in the paper? The chances are you won't.
Most daily papers carry only a limited amount of information on share trades and nothing on bonds. Moreover, most bonds are not traded on an exchange but rather in what is known as the over-the-counter market, accessible only to institutional and sophisticated investors.
This is true of developed bond markets globally and in Australia.
(Editor's note: To learn more about the features, benefits and risks of bonds quoted on ASX, and interest rate securities, take the free online ASX Bonds and Hybrids course.)
So what does the bond market look like in Australia?
The range of bond issuers in Australia is broad and bonds can take a number of different forms. For the purposes of this article, we will use a broad definition of bonds.
The total face value of bonds outstanding, the market approaches about two-thirds of the market capitalisation of the top 200 companies listed on ASX. This is a little unusual because global bond markets are many times the size of equities markets. Debt is plentiful but ownership is restricted.
Who are the big issuers of bonds?
Commonwealth and state governments are the big issuers of the bonds traded in the over-the-counter-market, with $573.7 billion were issued. Compared Australian companies, mostly financial institutions which accounted for $209.1 billion of bonds. Foreign issuers raising funds in Australia had $177.7 billion of bonds outstanding at the end of 2014 and asset-backed securities totalled $100.4 billion.
Most bonds issued in the over-the-counter market pay a fixed coupon, although floating-rate notes and a small number of inflation-linked bonds are available.
How can retail investors get into the market?
Retail investors, who usually don't have access to the over-the-counter market, must look to the listed bond market for fixed-income investment opportunities. Commonwealth Government bonds are listed on ASX and are therefore available to retail investors. These are the same bonds that are traded in the over-the-counter market.
Expanding the range of bonds from the over-the-counter market available to retail investors is on the agenda at ASX. They intend to do this by listing bonds that meet the requirements of the Simple Corporate Bonds Bill passed by Parliament on 2 September, 2014. By our estimation, there are about 70 individual bond issues with an aggregate face value of more than $15 billion that could be transmuted to the retail market - provided the issuers agree.
Other debt-like instruments listed on ASX offer higher yields and higher levels of risk than would typically be associated with a bond. Apart from around $1.1 billion of senior-ranking bonds, there are more than $16 billion of subordinated bonds or notes outstanding and $24 billion of hybrid notes.
Financial institutions dominate the issuers, with very few issues being from non-financial companies. This is an imbalance ASX hopes to address with the transmutation of more bonds from the over-the-counter market.
To support the development of a more active retail bond market in Australia, ASX recently implemented the ASX Debt & Hybrid Research Scheme. It aims to incentivise greater levels of research, available to not only wholesale but also retail investors, on ASX-quoted debt and hybrid securities, including the assignment of credit ratings to all debt and hybrid securities traded on ASX. Australia Ratings has been engaged by ASX to provide the research.
About the author
Dr Philip Bayley is a director of Australia Ratings and the principal of debt capital markets consultancy, ADCM Services.
Bonds provides information on the features, benefits and risks of various debt securities.