Markets had anticipated less new issuance due to monetary policies, however investors still saw a healthy pipeline of supply. This was mostly a result of corporate issuers taking advantage of market conditions and locking in funding ahead of any potential rate rises in the near future. Green issuance was also on the rise over the year. Here we discuss the key trends in primary markets over 2021.
Over $126bn worth of AUD denominated bonds were issued in the 2021 calendar year across corporate, financial institution and government issuers. This data excludes short-dated securities (such as T-bills) as well as securitisation transactions.
When the Reserve Bank of Australia (RBA) introduced the Term Funding Facility (TFF) in 2020 (until June 2021), fixed income investors were expecting a hit to the amount of new issuance coming to market. The TFF provided a source of low-cost funding for the banking system, reducing the reliance on fixed income investors.
While the amount of new issuance from banks and financials issuers decreased, it was only marginal compared to the prior years. Issuance from governments was also lower, while corporate issuance and new green issuance increased. We further discuss the themes across the three main issuer segments.
Government, Corporates and Financials Issuance
Issuance across Commonwealth and state-governments was $70.5bn for the year, and while the sector raised the largest amount of issuance, it was considerably down from the prior year. This is most likely due to the need in 2020 to raise funds to support the large stimulus and nation-building initiatives to stabilise the economy at the heights of the COVID-19 pandemic.
This would also point to the larger volume of Commonwealth and state-governments issuance this year, compared to in 2019, to further support the economic recovery.
Banks & financials were another sector to decrease the amount of issuance over the year compared to prior years, which placed AUD41.4bn in 2021. However, this was down only ~$7bn compared to 2020.
As mentioned, this was mostly expected, with the RBA’s TFF providing 3-year funding for authorised deposit-taking institutions (ADIs), such as banks and financial institutions, at a fixed interest rate of 0.25%. This redirected new issuance away from debt capital markets, as the below chart shows the decrease in the size of banks’ domestic bond issuance (pink line), as the TFF funding source increases (yellow line).
Bucking the sector trends, corporate issuance increased in size over 2021 compared to both 2019 and 2020, with $14bn issued. There was in particular a rush towards the backend of 2021 as corporate issuers raced to take advantage of market conditions and lock in funding ahead of any potential rate rises.
While the RBA has been consistent in its messaging that conditions warranting rate hikes are unlikely to be met until 2024 (with the potential for an earlier move in late 2023), the fixed income markets have been creeping benchmark rates higher prior. Benchmark AUD 3-year swap rates jumped from 0.16% in January to 1.29% in December, while the benchmark AUD 10-year swap rate surged from 1.10% in January to 2.04% in December.
We would expect to see continued steady corporate issuance ahead of 2024, and likely a shift from fixed coupon issuance to floating rate note to match investor demand.
A growing sector in terms of issuance, Ethical Social Governance (ESG) bonds have become a bigger part of fixed income markets. A sub-sector of this, green bonds is also on the rise, with $6.8bn issued over 2021, which is almost three times the amount issued last year.
Green bonds refer to issues where the proceeds are specifically dedicated to raise money for climate and environmental projects. A newer type of green bond, the sustainability-linked instrument, is where the issuer sets neutral or positive impact targets, although the proceeds are not specifically earmarked for ‘green’ projects.
According to Bloomberg, global issuance of ESG bonds hit USD$1trn this year, which is more than double what was sold in 2020. The sector is gaining more attention as more issuers are pushed to raise ethical debt by investors.
With ongoing debates and awareness around climate change, green bonds are a segment that will continue to grow as investors align their financial goals with their core values.
Despite another disruptive year caused by COVID-19 related uncertainty and monetary policy measures, there was a solid supply of new issuance across government, corporate and financial sectors.
We expect to see this further increase as the economic recovery picks up, and the reliance on the RBA’s TFF funding source unwinds come 2024. Furthermore, near rate hikes will also hasten the amount of issuance as issuers lock in funding at lower levels.