Bond Market Trends
Topic 2 Bond market developments
Overview
Financial markets have been subject to significant changes in recent years due to the credit crisis. Experts believed that risk was being under-priced, which was expressed in the markets by a narrow spread. They believed that once the market corrected this under-pricing and re-priced the risk, it would likely cause a dislocation in financial markets by overshooting its equilibrium. Hence the prices, yields and returns on bonds have been significantly effected by the global financial crisis. Looking at the effects this credit crisis had on the short term money market by evaluating bond performance over the past 10 years can give us significant insight into the extent of this dislocation.
- Describe the trends in the issue of government bonds in the past 10 years
Although the credit crisis has had a significant effect on the money market, Government bonds have remained quite stable for the past ten years. This is because government have decided to maintain the issue of CGS constant at 50 billion to keep the market liquid and also announced an increase issuance of up to 25 billion in May 2008. However the spreads have widened and the maturity dates have narrowed on all bonds over recent years. The trend however is relatively stable in the grand scheme.
- semi govt bonds in the past 10 years.
The trend in semi-government bonds has been similar to that of government bonds. They have been relatively stable and have also been running budget surpluses. However they have recently raised their issuance by 12% due to their need to raise funds for infrastructure projects.
- main issuers of non government bonds in the past 10 years.
Non government bonds have grown to three times that of public sector debt from 20 billion in 1996 trending upwards to 200 billion in June 2006. This was throughout all four sectors of non government bond issuers (Financial institutions, non resident bonds, corporate bonds and
Overview
Financial markets have been subject to significant changes in recent years due to the credit crisis. Experts believed that risk was being under-priced, which was expressed in the markets by a narrow spread. They believed that once the market corrected this under-pricing and re-priced the risk, it would likely cause a dislocation in financial markets by overshooting its equilibrium. Hence the prices, yields and returns on bonds have been significantly effected by the global financial crisis. Looking at the effects this credit crisis had on the short term money market by evaluating bond performance over the past 10 years can give us significant insight into the extent of this dislocation.
- Describe the trends in the issue of government bonds in the past 10 years
Although the credit crisis has had a significant effect on the money market, Government bonds have remained quite stable for the past ten years. This is because government have decided to maintain the issue of CGS constant at 50 billion to keep the market liquid and also announced an increase issuance of up to 25 billion in May 2008. However the spreads have widened and the maturity dates have narrowed on all bonds over recent years. The trend however is relatively stable in the grand scheme.
- semi govt bonds in the past 10 years.
The trend in semi-government bonds has been similar to that of government bonds. They have been relatively stable and have also been running budget surpluses. However they have recently raised their issuance by 12% due to their need to raise funds for infrastructure projects.
- main issuers of non government bonds in the past 10 years.
Non government bonds have grown to three times that of public sector debt from 20 billion in 1996 trending upwards to 200 billion in June 2006. This was throughout all four sectors of non government bond issuers (Financial institutions, non resident bonds, corporate bonds and
References: Hunt & Terry, 5th edition, section 8.2 RBA, (2008), “Recent developments in the Australian bond market”, Bulletin, March, pp. 10-15 RBA (2008), “Recent Debt Market Developments”, Bulletin, August 2008, pp. 71-top of page 77 RBA (2008), Financial Stability Review, September, pp. 30-1