Question

Discuss the impact of the GFC on new bond issues, credit spreads and bond yields in Australia.

Answer 1

GFC (Global Financial Crisis) has had a significant impact on new bond issues, credit spreads and bond yields in Australia. Before the GFC credit grew as a fixed income markets in Australia. Post the crisis the size of Australia’s credit market (as a proportion of all fixed income in Australia) has been declining. New bond issues increased but the increase was restricted only to those issues that had good ratings. Before the crisis corporations relied mainly on short term funding but after the crisis they started looking at longer dated alternatives. After GFC credit spreads also increased. Before the crisis there was an apparent lower liquidity risk and this translated into lower spreads to match the lower risk levels. After the crisis the risk scenario became more realistic and with this the credit spread increased as well. The credit spreads in Australia now fluctuates with market risk tolerance. Credit spread for both corporate bonds and high yield bonds shot up in mid-2009 and after that it stabilized. Lastly bond yields fell and stabilized. Pre-GFC there was an endless search for more yields. The market euphoria led to increase in yields. After the GFC the yields stabilized as demand and supply came out of the market euphoria that existed prior to the GFC. This was the case for Baa corporate bond yields, government bond yields and credit spread as discussed earlier.