The driving factors Kent identified are improving economic conditions supporting profits and lowering default rates, reduced market uncertainty and, possibly, “that financial market participants appear to be willing to take on risks at lower levels of compensation”.

Attractive debt pricing for issuers – driven largely by demand conditions – has changed the shape of the Australian market, Kent explained. “Issuance is up across a range of markets. But quantities are not the only part of the story. Good demand conditions have also made it easier for a more diverse range of companies to issue. Moreover, tenor has increased, notably in the domestic market.”

RBA data show increased issuance in Australia across most markets, though growth is certainly not exponential. Kent drew particular reference to the bank sector, from which issuance in 2017 appears to have exceeded reserve-bank expectations.

He explained: “In 2016, banks acted ahead of time in preparation for the implementation of the net stable-funding ratio requirement. So, having issued a bit more paper in 2016 than had been the case for some time, it seemed reasonable to have expected that 2017 was going to be a somewhat subdued year for bank bond issuance. As it happened, though, banks took advantage of favourable funding conditions over the past year or so to tap the bond market more actively than might otherwise have been the case.”

Kent also highlighted “particularly strong” issuance of residential mortgage-backed securities (RMBS) in 2017. He suggested that demand-side factors were the “dominant influence” on the securitisation renaissance, while noting that business growth in the nonbank-lender sector also likely contributed to the surge. 

The financial sector has been at the heart of the issuance growth story, according to Kent. While noting that domestic corporate and Kangaroo issuance were both stronger in 2017 than the suppressed levels of the preceding year, he also pointed out that “there have been recent years where issuance was higher” in both sectors.

The issuance diversity story is somewhat more positive, though. Kent pointed to the fact that RMBS issuance concentration has fallen steadily since 2014 – and at a higher pace in 2017 – while diversity in the Kangaroo market has been increasing for a decade. Meanwhile, the corporate-issuance picture is “not dominated by resource companies in the way it has been in the past”.

Kent characterised these developments, as well as the emergence of a longer-tenor market in Australia, as positive. “But the outlook is not without risks,” he warned.

“Accommodative monetary policies have encouraged greater risk-taking by both lenders and borrowers,” he continued. “This is one of the important ways in which the monetary transmission mechanism works. It has supported the decline in spreads and other positive developments…At the same time, however, the combination of low interest rates and low volatility in financial markets is of concern to the extent that it can lead to excessive risk-taking via a search for yield.”

As to whether risk-taking in the Australian market can legitimately be described as excessive, Kent said it is “hard to say” based on available evidence. For example, he pointed to the fact that RMBS spreads have not fallen as far as those of other credit asset classes – likely due to a combination of a persistent post-crisis reassessment of the risk profile of the asset class by investors and the build-up of housing-market and household balance-sheet risks in Australia.

Kent added: “It’s not clear that the relatively low level of spreads in fixed-income markets represents irrational mispricing of risk or is, by itself, a cause of concern. Issuance has picked up, but it is not especially high. Moreover, measures of corporate indebtedness are generally not elevated.”