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Australia Bond Market

The Australian bond market has grown rapidly over the last ten years, from just AUD 30 billion in 1997 to over aus 200 billion now, representing 25 percent of Australia's gross domestic product (GDP).

Back in 1997, Australian government bonds (called 'CGS') and bonds issued by state borrowing authorities (called 'semis') made up more than half of the market. However, over the last decade most states have run their budgets at a surplus, and so have not needed to borrow on the open market. Now, semis and CGS make up only just over twenty percent of the total market.

Instead, bonds issued by banks, financial institutional and companies make up most of the market. Bonds issued by Australian banks and financial institutions account for about twenty percent of the total Australian bond market, while asset backed securities - bonds which are issued on the security of companies' assets, such as real estate - account for nearly 25 percent.

Australian corporates on the other hand are only responsible for a slim ten percent, which has led to suggestions from some quarters that the market may be too small to fund Australian companies' financing needs - particularly in the strongly growing mining sector.

Another one fifth of the market is accounted for by so-called Kangaroo bonds, issued in Australia by foreign companies. These were hardly known back in the 1990s, but have proved a popular area of issuance over the past decade.

The growth of kangaroo bonds, asset backed securities and bank borrowing has made the Australian bond market far more diverse than used to be the case. It now offers a choice of fixed interest securities to suit all investment needs.

The global economic crisis has affected the Australian bond market unevenly. While banks have continued to issue bonds, corporates have found it difficult to source finance, and the asset-backed bond market seems to have dried up.

Asset backed bonds did well on the back of the Australian housing boom up to 2003 - a large proportion of the bonds issued were residential mortgage-backed securities (RMBSs). It is not surprising that once the housing boom had crumbled, RMBSs became less attractive.

However other areas of the market are seeing good issuance rates. Overall, the Australian bond market is a large and efficient market, with ten market makers and high liquidity.

Australia has a compulsory retirement savings system, and this has made domestic pension funds a major source of demand for bonds. Other domestic fund management institutions also invest in the bond market, but around a quarter of Australian bonds are held by non-resident investors - proof of the strong appeal of the market.

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