Finally, belatedly, we are about to get a retail market for Commonwealth government securities, with the ASX set to start trading government bonds later this month.
While the timing – years after ASX first started pushing for the establishment of such a market – may not be ideal, given the low interest rate environment and the reality that even the 10-year bond rate has a '3' in front of it, it represents an important first step in a longer term attempt to establish a properly functioning retail market for corporate bonds.
Given the relative sophistication of Australian capital markets, the lack of a retail market in corporate bonds has long been a glaring omission from the range of securities available to investors.
It isn’t that retail investors won’t or don’t invest in bonds. The scramble by retail investors to subscribe to quite exotic and complex hybrid issues in recent years in their pursuit of yield is evidence of a substantial appetite for fixed interest securities.
What has been lacking is a deep and liquid market in vanilla corporate bonds. While there has been the odd exception, blue-chip Australian corporates, including the banks, have tended to raise their funds offshore in wholesale debt markets.
The financial crisis and its impact on those markets – it effectively closed them for some time – reinforced the need to at least try to establish a deeper domestic market to create a funding source independent of distant markets that might be subject to quite different influences than those within this economy.
The prerequisite for a retail corporate bond market are securities that provide a clear reference point off which other securities can be priced. Commonwealth Government securities provide a risk-free rate and baseline pricing for other securities but until now trading in them has essentially been confined to institutional investors.
The appeal of the platform ASX is creating and which it hopes will develop into a fully-fledged retail bond market isn’t just as an alternative for retail investors and self-managed funds to equities or exotic hybrids but, for companies, as potentially a competitive source of Australian dollar funding to the banks – who themselves would see the prospective funding diversity it could offer them as attractive.
For the increasing amounts of funds held in self-managed vehicles, and against the backdrop of a population that is ageing and living longer, retail bonds could be an important diversifier as well as a provider of core low-risk and predictable income streams.
While the launch of ASX’s exchange-traded government bonds on May 21 will lift the amount of ASX-quoted interest rate securities for retail investors from $35 billion to about $280 billion, the attempt to establish a broader and deeper market is a long-term project and one that might grow more quickly in a different interest rate cycle.
At present investors are being pushed into riskier asset classes by the meagre fixed interest yields on offer in a world awash with near-costless central bank credit and heavy interventions by central banks in debt markets.
At some point – and it could be quite a "messy" point – the plunge into those higher-risk asset classes which have, in this market, prompted discussions about bank share price "bubbles", will reverse and investors will look for low-risk assets with certain income streams. At that point the new ASX market could come into its own.