In a low interest rate environment, the further development of a corporate bond market in Australia should be encouraged, a parliamentary hearing has been told.
Corporate bonds, while slightly riskier, offer higher returns than government bonds and should be considered as part of a superannuation portfolio.
However Australian Financial Markets Association policy director Rob Colquhoun says investor education is biased toward equities.
Corporations wanting to raise sizeable debt issues also see greater certainty in getting their bonds away in overseas markets.
“There is still a perception, at least from an issuance perspective, that the depth and liquidity offshore provides the certainty they might not get in Australia,” he told federal MPs on Friday.
Rand Low, an associate professor at Queensland’s Bond University, and having worked on Wall Street with Merrill Lynch and BlackRock, says a vast majority of Australian superannuation accounts are all in equities.
He believes this is extremely risky because a large bulk of the ASX is made up of mining firms and the big four banks.
So if the economy impacts mining or banking, pension portfolios suffer.
“We need to encourage people to rebalance their portfolios from equities onto bonds,” Dr Low said.
There is also a taxation issue when considering investing in corporate bonds.
Equities have the incentive of franking credits, while property has negative gearing.
“You have nothing for corporate bonds,” Dr Low said, suggesting a capital gains tax concession.
In February, Treasurer Josh Frydenberg called on the Standing Committee on Tax and Revenue to investigate the potential development of Australia’s corporate bond market.
In the terms of reference, it says that over the past decade Australian governments have made amendments to the regulatory regime for corporate debt to facilitate a deeper and more active retail corporate bond market.
“However the Australian retail bond market remains small in comparison to similar countries and, in terms of amount of debt raised, Australian-based businesses make greater use of offshore bond markets,” it says.