Corporate Bonds in Australia Market Overview

Australia's corporate bond market is a significant player in the country's financial landscape. It has grown steadily over the years, with the market size reaching $143 billion in 2020.

In terms of issuance, Australian companies have been increasingly tapping into the bond market to raise funds. According to data, the number of corporate bond issuances has risen by 24% between 2015 and 2020.

The Australian government has also been actively involved in the corporate bond market, with the Australian Office of Financial Management (AOFM) issuing bonds to help manage the government's debt. This has helped to provide liquidity to the market.

The corporate bond market in Australia offers a range of maturities, from short-term to long-term bonds, providing investors with flexibility in their investment choices.

Corporate bonds are essentially loans that companies take out to secure external funding for investment or expenditure. The bondholder loans capital to the issuing company, who then repays the loan in a manner outlined by the bond.

The issuing company makes a series of fixed interest payments, called coupons, on a regular basis. These payments are a key part of the bond.

When the bond reaches its expiration date, also known as maturity, the face value or principal amount of the loan is repaid. This is the final payment made to the bondholder.

Companies sell bonds to raise funds for various purposes, including buying capital equipment or property. This can be a more favorable option than traditional lending channels, like banks.

Companies may use the funds raised from bond sales to fund research and development, which can be a game-changer for their business. This can help them stay ahead of the competition and drive innovation.

Some companies sell bonds to refinance debt, which can help them manage their finances more effectively. This can also help them free up cash for other important business needs.

Companies may also sell bonds to buy back issued shares from shareholders, which can help them regain control of their company. This can be a strategic move to increase shareholder value and improve the company's overall performance.

Paying dividends on existing shares is another reason companies sell bonds. This can help them reward their shareholders and maintain a positive relationship with them.

Companies can also use bond sales to finance mergers and acquisitions, which can help them expand their business and increase their market share.

Corporate bonds work by allowing companies to secure external funding for investment or expenditure. The bondholder essentially loans capital to the issuing company, who then repays the loan in a manner outlined by the bond.

The issuing company makes a series of fixed interest payments, called coupons, on a regular basis. These payments are a crucial part of the bond agreement.

When the bond reaches its expiration date, also known as maturity, the face value or principal amount of the loan is repaid. This is the final step in the bond's life cycle.

The quality of a corporate bond is assessed by rating agencies like Standard & Poor's, Moody's, and Fitch Ratings. They evaluate the likelihood of a company defaulting on the bond, which is known as credit risk.

A bond's credit risk is reflected in its rating, with lower risk bonds receiving higher ratings, such as AAA from Fitch Ratings.

Investing in corporate bonds can be a great way to diversify your portfolio and earn regular income. Corporate bonds are debt securities issued by companies to raise funds for various purposes.

The Australian corporate bond market offers a wide range of investment opportunities, with over 100 issuers listed on the Australian Securities Exchange (ASX). This provides investors with a diverse pool of bonds to choose from.

Before investing in corporate bonds, it's essential to understand the risks involved. Corporate bonds carry credit risk, which is the risk of the borrower defaulting on their loan.

To invest in corporate bonds, you can consider Betashares' fixed income funds that invest in corporate bonds. These funds provide a simple and cost-effective way to add this asset class to your investment portfolio.

You can buy or sell units on the ASX using an online brokerage account or through a financial adviser, just like you'd buy or sell any share on the ASX.

Historically, Australian investors have faced challenges in accessing corporate bonds.

They are often traded between large institutions without ever being offered to everyday investors.

Exchange-traded funds (ETFs) are helping democratise investing in the Australian fixed income market.

A number of corporate bond ETFs exist on the ASX, offering several benefits.

ETFs trade on an exchange, making it easy for investors to buy and sell their holdings.

Some corporate bond ETFs pay out interest monthly, providing regular cashflow to investors, with the option to reinvest their income.

This regular income can be a huge advantage for investors looking to generate steady returns.

By investing in corporate bond ETFs, you can diversify your bond portfolio across a range of issuers.

Corporate bonds in Australia come with several risks that you should be aware of. Default risk is one of the main concerns, where the issuer may not be able to make interest or principal payments as promised.

Interest rate risk is another significant risk, as bond prices can be sensitive to changes in interest rates. This is particularly true for bonds that are not due to be repaid for many years.

Credit risk is also a major consideration, as it refers to the possibility that the company issuing the bond will default on their coupons or principal repayment. Rating agencies assess the creditworthiness of bonds and bond issuers, and are looked to as authoritative sources for credit risk information.

Liquidity risk is another risk to be aware of, as it's the possibility that the market may not have enough buyers to purchase your bond holdings quickly and at the current price.

Here are some key risks to consider:

Credit risk is a significant concern when investing in corporate bonds. It refers to the possibility that the company issuing the bond will default on their coupons or principal repayment.

Rating agencies like Standard & Poor's, Fitch Ratings, and Moody's assess the creditworthiness of bonds and bond issuers, providing authoritative information on credit risk. They classify bonds as investment-grade or non-investment-grade, with the latter being known as "high yield" or "junk" bonds.

A riskier bond will usually trade at a lower price than a bond with a lower risk profile and a similar coupon. This is because investors demand higher returns to compensate for the increased risk of default.

Here's a breakdown of credit ratings:

It's essential to consider credit ratings when evaluating the risk of a particular bond or bond portfolio. Fixed income ETFs usually disclose the weighted average credit rating of underlying bonds held.

Interest rate risk is the chance that rising interest rates will result in a depreciation of your bond's market price.

If interest rates rise above the coupon rate, demand for the bond is likely to drop, making it harder to sell the bond at a good price.

The general rule is that interest rates and bond prices are inversely correlated – as one rises, so the other falls.

This means that if interest rates go up, the value of your bond will likely go down, and vice versa.

Companies will be hesitant to issue bonds if interest rates are too high, which can reduce the supply of bonds in the market.

If interest rates are lower than the coupon rate on a bond, the bond offers a better return and demand will likely rise.

Inflation risk is a potential threat to your bond's market price, and it's essential to understand how it works.

High inflation means that the purchasing power of your bond's fixed coupon payment amount decreases.

Monetary authorities often raise interest rates when inflation is high, which can negatively affect the price of your bond.

A worst-case scenario is when the rate of inflation rises above the coupon rate of your bond, resulting in a loss of money in real terms.

Higher interest rates are inversely related to bond prices, so when interest rates rise, the market price of your bond typically falls.

Supply and demand play a crucial role in determining corporate bond prices. It's a dynamic market where the attractiveness of a bond relative to other investment opportunities influences demand.

Interest rates are a key factor in supply, as companies consider the cost of borrowing through alternative credit channels. This makes interest rates a significant player in the market dynamic.

The financing needs of a company also impact supply, as they seek to raise capital through bond issuances. Companies with high financing needs may issue more bonds, increasing supply.

Credit ratings play a crucial role in evaluating the risk of corporate bonds in Australia. Credit ratings assess the likelihood of a corporate bond issuer defaulting on their payments.

Standard & Poor’s, Fitch Ratings, and Moody’s are the main agencies that assess credit ratings for corporations and governments. They classify bonds as either investment-grade or non-investment-grade, with investment-grade bonds typically scoring between “AAA” to “BBB” depending on the agency.

Investment-grade bonds are considered to be of lower risk, while non-investment-grade bonds, also known as high-yield or junk bonds, are typically defined as those with a BB rating or lower.

Fixed income ETFs usually disclose the weighted average credit rating of the underlying bonds held, providing investors with a clear understanding of the overall risk profile of the investment.

Here's a breakdown of the credit ratings for corporate bonds in Australia:

Note that the average yields listed above are based on data from January 2005 to April 2018 and may not reflect current market conditions.

Investors should consider credit ratings when evaluating the risk of a particular bond or bond portfolio. A riskier bond will usually trade at a lower price than a bond with a lower risk profile and a similar coupon.

The credit rating of a bond can also impact its yield, with higher-risk bonds typically offering higher yields to compensate for the increased risk.

Credit ratings play a significant role in determining the risk of a corporate bond issuer defaulting, with riskier bonds trading at lower prices than those with lower risk profiles.

Defaults can still happen with corporate bonds, especially if the issuer's credit rating is low, which can impact the bond's price.

A bond's credit rating from agencies like Standard & Poor’s, Moody’s, and Fitch Ratings can affect its price, with riskier bonds trading at lower prices.

The price of a bond can also be influenced by its coupon, with bonds offering similar coupons but with lower risk profiles trading at higher prices.

Australian corporate bonds have historically provided a safe haven for investors during market downturns.

They tend to rise when Australian shares fall, making them a great option for diversifying a portfolio.

This is because corporate bonds are less volatile than shares, offering a more stable return on investment.

In fact, Australian corporate bonds have historically risen when Australian shares have fallen, providing potential defensive benefits for portfolios.

This means that even if the share market takes a hit, corporate bonds can help protect your investments.

When investing in corporate bonds in Australia, it's essential to understand the portfolio characteristics.

The running yield of a corporate bond in Australia can be as high as 4.99% per annum, which is the return an investor can expect from the bond's current market price.

The yield to maturity and yield to worst are the same for this bond, at 5.54% per annum, indicating that the bond's return is relatively consistent.

The average maturity of corporate bonds in Australia is around 6.97 years, which means investors can expect to hold onto their investment for several years.

The modified duration of a corporate bond is a measure of its sensitivity to interest rate changes, and for this bond, it's approximately 5.55 years.

Corporate bonds in Australia typically carry an average credit rating of BBB+, which is a mid-level rating indicating a moderate level of credit risk.

Here's a summary of the key portfolio characteristics:

Corporate bonds in Australia are issued with varying frequencies, with some distributed monthly. This frequency is consistent across different bond ratings, including A-rated and BBB-rated bonds.

Monthly distributions are a common occurrence, with A-rated bonds having a 12-month distribution yield of 4.8% as of January 31, 2025. This yield is calculated based on the prior 12-month per unit distributions divided by the closing NAV per unit at the end of the relevant period.

The effective tenor of corporate bonds in Australia can vary significantly, with A-rated bonds having an effective tenor of 9.260 years as of April 2018. This is a decrease from the previous number of 9.270 years for March 2018.

The Solactive Australian Investment Grade Corporate Bond Select TR Index is provided by Solactive AG, a reputable index provider.

This index has a specific ticker on Bloomberg, known as SOLAUSIG Index.

The index provider is Solactive AG, a well-known name in the industry.

Here's a quick rundown of the index information:

When it comes to frequency, it's essential to understand how often you can expect to receive distributions. Monthly distributions are available, providing a regular stream of income.

The frequency of distributions can have a significant impact on your investment strategy. For instance, if you're looking to receive a steady income, monthly distributions might be a better option.

You can elect to receive monthly distributions by logging into Link's Investor Centre. Once you're logged in, proceed to the 'Payments and Tax' tab and select 'Reinvestment Plans'.

Monthly distributions can help you spread out your income, making it easier to budget and plan for the future.

Tenor refers to the length of time that a bond's cash flows are expected to be received. In Australia, corporate bonds can have varying tenors, with some lasting as short as 3 years and others as long as 10 years.

The Reserve Bank of Australia reports that corporate bonds with an A-rating have an effective tenor of 9.26 years as of April 2018, down from 9.27 years in March 2018.

Corporate bonds with a BBB-rating have a significantly shorter effective tenor, standing at 3.13 years as of April 2018.

Here's a comparison of the effective tenors for A-rated and BBB-rated corporate bonds in Australia:

The frequency of corporate bond data collection in Australia is monthly, allowing for a detailed analysis of trends and changes in the market.

The data for corporate bond tenors in Australia is available from January 2005 to April 2018, with a total of 160 observations.