Commonwealth Government Bonds to trade on ASX

By ASX

Strong growth in the ASX Interest Rate Securities market is expected to continue in 2012-13 as more companies issue debt via ASX, and as Commonwealth Government Bonds (CGBs) are traded on the exchange.

The combined market capitalisation of ASX Interest Rate Securities grew 26.5 per cent to $28 billion over the year to July 2012 due to rapid growth in bond and hybrid issuance. Monthly trading volumes rose 46.5 per cent over this period.

The upcoming trading of CGBs on ASX has the potential to transform Australia’s listed debt market. Quoted government bonds will provide important mass for the ASX Interest Rates Securities market and attract more retail investors and financial intermediaries.

For ASX-listed companies, it should mean a wider audience for ASX-listed debt products, and greater scope for companies to raise debt via the exchange rather than through over-the-counter markets.

In turn, a larger Australian listed debt market will help companies diversify their funding sources and create a bigger platform to tap latent retail investor demand, especially from self-funded retirees seeking fixed-income investments.

Listed@ASX spoke to Ken Chapman, General Manager at ASX, about plans to quote and trade CGBs on the exchange.

Listed@ASX: Which CGBs will trade on ASX?

Ken Chapman: There will be two types of CGBs traded in the ASX market: 1) Treasury Bonds, which are medium to long-term debt securities that carry an annual rate of fixed interest over the life of the security, payable six monthly; and 2) Treasury Indexed Bonds, which are also medium to long-term securities with the capital value of the security adjusted for movements in the Consumer Price Index (CPI).

Listed@ASX: How will CGBs trade on ASX?

Ken Chapman: They will trade in the form of Chess Depositary Interests (CDIs). Investors who buy a CGB traded on ASX are ultimately lending money to the Commonwealth Government, with its guarantee to pay them interest (the coupon) and principal (the CGB’s face value) at maturity.

Listed@ASX: Why will CGBs appeal to investors?

Ken Chapman: ASX believes there is significant retail investor demand for fixed- and floating-rate listed debt instruments -- and that investors want to buy and sell interest-rate products via an exchange, just as they do shares. 

This demand is partly cyclical, as more investors seek greater exposure to fixed income and less exposure to equities; and partly structural, as Australia’s ageing population seeks lower-risk, income-style investments.

We expect ASX-listed CGBs to appeal to investors who desire secure, regular and stable income streams and want to enhance portfolio diversification by increasing fixed-interest asset allocations. CGBs are considered to have the lowest possible credit risk.

The other big advantage of CGBs traded on ASX is they can be bought in much smaller parcels than that traded in the wholesale markets, and will have much greater access to liquidity compared to unlisted debt products, or when locking money away in bank term deposits. Treasury Index Bonds in particular should appeal to retirees seeking investments that safeguard against movements in the CPI.

Another attraction is CGBs fill out the risk curve in the ASX Interest Rate Securities market. Investors seeking lower-risk investment can choose CGBs. Those seeking higher returns and risk can choose ASX-listed corporate bonds or subordinated notes, while ASX-listed hybrid securities, which have debt and equity characteristics, also offer higher returns and risk.

Listed@ASX: What does the quotation of CGBs on ASX mean for ASX-listed companies?

Ken Chapman: Having CGBs quoted on ASX will provide an important ‘cornerstone’ for the development of what is hoped to be a much larger listed debt market. As more retail investors and financial intermediaries use ASX to execute fixed-income asset allocations in portfolios, and become more familiar with debt products, we expect greater demand for other listed debt instruments.

The ‘critical mass’ that comes from having CGBs traded on ASX creates more incentive for intermediaries to produce research on the broader ASX Interest Rates Securities market and educate and advise retail clients on these instruments.

This is good news for Australian companies that will benefit from access to a vibrant local listed debt market and wider audience for their issuance. The Global Financial Crisis showed how offshore debt markets can close very quickly, and why Australian companies need access to multiple sources of debt funding to mitigate capital-markets risk.

Listed@ASX: Do you expect to quote more government bonds on ASX in coming years?

Ken Chapman: Yes. However, the focus now is very much on Treasury Bonds and Treasury Indexed Bonds.  The challenge is to educate investors and intermediaries on the benefits of risk diversification and investment in the fixed income asset class, of which CGBs represent the foundation.

Listed@ASX: When does ASX expect to quote CGBs?

Ken Chapman: Our target date is before the end of 2012. More information will be released to the market in the lead-up to the market going live.

Listed@ASX: How can companies get more information about debt issuance via ASX?

Ken Chapman: Listing Debt on ASX has useful information about the process for debt issuance on ASX. We recommend companies talk to ASX at an early stage regarding listing as a debt issuer. 

We are happy to discuss confidentially what is involved and review draft documentation to help ensure the smooth passage of any proposal. Call ASX Compliance on +61 2 9227 0133.