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30.16 THE GLOBAL BOND MARKET
TRENDS IN KANGAROO BONDS
From the mid-1990s, the Commonwealth and state governments in Australia reduced debt security issues as budget surpluses and privatisation proceeds were used to repay debt. Gross outstanding Commonwealth Government securities and state government securities recorded decreases from 2000 to 2005, while issues of non-government debt securities grew steadily. There was a strong build-up of managed funds over the same period, fuelled by superannuation contributions (see table 26.23 in the Financial system chapter). These funds were valued at $839b as of March 2005. This growth, coupled with the decreasing government bonds on issue, stimulated development of the non-government bond market to meet the resulting high demand for debt securities. As at June 2005, there were $205.2b of long-term non-government securities on issue in Australia. This was an increase of 25.4% over the June 2004 value of $163.7b.
One of the notable contributors to the growth in the non-government bond market has been the increase in non-resident bond issuers (Kangaroo bonds). Kangaroo bonds issued increased to $15.2b in 2003-04 from a level of $1.8b in 2002-03. In 2004-05, non-resident borrowers entered the bond market with $8.4b in issues, of which approximately $5.8b (70%) were taken up by residents.
For Australian investors, Kangaroo bonds became attractive during this period, as did all highly rated corporate bond issues. The credit spread (the price difference between AA bonds from corporate issuers when compared with similarly denominated government issues) decreased in the first half of 2003 then picked up again in 2004. With the decreasing availability of government bonds, AA corporate bonds were being favoured as the best alternative in fixed income securities. This lowered the cost of borrowing for corporate borrowers and helped to increase the attractiveness of Australian denominated debt for non-resident issuers.
From the issuer's perspective, the reasons for the increasing levels of Kangaroo bond issues were less obvious, given the relative changes in official interest rates since early-2001. Since January 2001, Australian interest rates were higher than rates in Europe and the USA. Over time, the gap increased, (graph 30.17). This made issuing competitively priced debt securities in the Australian market more expensive than in other markets.
One explanation for the issuer choosing Australia as a market for their bonds was the reluctance of resident fixed interest fund managers to invest in non-resident markets due to the return not being high enough to justify the extra risk of corporate bonds. This made funds less available to non-resident borrowers in other markets. This, however, does not explain why non-resident corporations would rather issue debt than borrow from financial intermediaries in low-interest rate countries.
Anecdotally, it is suggested that two main drivers explained trends in Kangaroo bond transactions. From the issuer's point of view, the first commonly quoted reason for the growth in Kangaroo bonds was a desire to diversify funding. Diversifying currency exposures for issuers lowers the risks associated with foreign borrowings. The second is the widening interest rate basis swap. This widening effectively made it cheaper for borrowers to hedge against interest rate movements.
SOURCE OF KANGAROO BONDS
For the financial years 2000-01 to 2004-05, Kangaroo bonds issued by non-residents in the Australian market totalled $36b (table 30.18). Of this, financial institutions were the dominant issuer, accounting for $25b as at June 2005, while supranational and other organisations accounted for $11b. Total Kangaroo bond issues decreased from $15b in 2003-04 to $8b in 2004-05. The decrease coincided with a decrease in Australian investor demand for bonds issued by non-residents. With domestic and global credit growth, most investors preferred high yield securities rather than the status (credit rating) of the international issuer.
Residents of the USA were issuers of most Kangaroo bonds on issue, as at 30 June 2005 (graph 30.19). Other significant issuers were the Cayman Islands, United Kingdom, Germany, Netherlands and Canada. The value of bonds on issue grew over the five-year period by almost $28b with issues from USA resident institutions accounting for nearly $11b of this total.
USE OF KANGAROO BONDS
When Kangaroo bonds are taken up by residents of Australia, this represents claims by Australian residents on non-residents, hence Australian investment abroad. During the period 2000-01 to 2004-05, of the total Kangaroo bonds issued, $25.3b (or 70%) were taken up by Australian residents.
New issues of Kangaroo bonds taken up by Australian residents are included in long-term portfolio debt securities (bonds and notes) transactions. These appear as debit entries in the financial account of Australia's balance of payments, representing an increase in assets. The resident holdings of Kangaroo bonds contribute to assets in Australia's IIP and continue to make a substantial contribution to Australia's net position.
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