Spreads on all bonds relative to top rated Commonwealth government bonds have increased in due to recent credit market turmoil, the Reserve Bank of Australia (RBA) said today.

RBA assistant governor for financial markets Guy Debelle said the spreads of semi-government, or state issue, bonds have also increased.

“For example, the 10-year spread between semis and Commonwealth government securities has averaged 55 basis points over the past year, around double the margin before mid 2007,” Dr Debelle told the Debt Markets 2008 Summit in Sydney today.

“This increase is hard to explain because the credit risk of semi-government bonds is very low and is unlikely to have increased over this period.

“One possible explanation is that investors, particularly offshore, have preferred to only hold the sovereign names in times of diminished risk appetite.

“Another is that there has been a liquidity premium in the commonwealth securities market.”

Dr Debelle said the financial sector had driven a marked increase in non-government bonds during the past year.

“Australian banks’ bond issuance has been very strong, particularly in the first half of 2008, when issuance totalled $67 billion, well above the average $32 billion raised in the same period in 2005 to 2007,” he said.

Dr Debelle said the banks had undertaken a larger share of financing in the non-government sector during the credit turmoil.

“This is evident in the fact that, notwithstanding the strong financial issuance, total government bond issuance has been around average levels over the first half of the year,” he said.

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Dr Debelle said the securitisation market had been the most affected part of the Australian bond market.

Since the onset of the credit market strains in mid 2007, the volume of Australian residential mortgage-backed securities (RMBS) issuance has been very low, he said.

“Quarterly issuance has averaged $2 billion compared to average quarterly issuance of $18 billion over the previous year.”

The stock of RMBS has fallen by about 20 per cent since the peak in mid 2007 to $140 billion.

“The fall has been more pronounced offshore, as the limited issuance that has taken place has been onshore,” Dr Debelle.

But Dr Debelle said there was signs of improvement.

“Although the securitisation market continues to be dislocated, there have recently been some signs of improvement, with a number of public issues taking place in recent weeks,” he said.

“Some of these issues have been upsized or oversubscribed due to strong investor demand.”

The asset-back commercial paper (ABCP) market also had been strained in since mid 2007, with outstanding Australian ABCP falling by 30 per cent since the peak in July 2007.

“The slightly better performance of the Australian market owes, in part, to the different purpose of the ABCP conduits in Australia, which are used to fund loans rather than securities to a greater extent than in the United States,” he said.

“Spreads continue to be at elevated levels - around 50 to 60 basis points spread to the bank bill swap rate compared to an average spread of five basis points prior to the onset of the turbulence.”

Dr Debelle said there was global credit market strength amid the turmoil.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” he said.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks.

“This has substituted for the dislocation in asset-backed and corporate bond markets.”

AAP