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Australia sells A$7.6b of 30-year debt in record deal

Wednesday, October 12, 2016 - 16:28
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Australia's government sold its biggest-ever bond, raising A$7.6 billion (S8 billion) in a debut offering of 30-year securities. Yields on benchmark 10-year debt jumped to the highest since June.

[SYDNEY] Australia's government sold its biggest-ever bond, raising A$7.6 billion (S8 billion) in a debut offering of 30-year securities. Yields on benchmark 10-year debt jumped to the highest since June.

"The eventual size was slightly larger than we expected, but does show good demand," said Roger Bridges, chief global strategist for rates and currencies at Nikko Asset Management's Australia unit. The 30-year notes offer "relative value against swaps" and comparable overseas notes, he said.

The new March 2047 securities were priced to yield 3.27 per cent, the Australian Office of Financial Management said in a statement Wednesday. The bank-managed transaction further extends the nation's yield curve following the AOFM's sale of 2039 bonds a year ago.

Australia took the opportunity to raise money for longer after yields plunged to unprecedented lows this year and as the government's borrowing needs blew out. Lower commodity prices and reduced mining investment sapped revenues, while the authorities have also struggled to rein in spending. The country is in the midst of its longest stretch of budget deficits since at least 1970 and expectations for a return to surplus have been repeatedly pushed back.

The face value of the government debt pile at the end of last week was A$443 billion and budget estimates have it climbing to almost A$500 billion by the end of June 2017.

The yield on the notes is higher than comparable sovereign bonds in other major developed markets. The benchmark rate in the US was 2.51 per cent as of 5pm in Sydney, while for Japan it stood at 0.5 per cent and Germany's was at 0.65 per cent. The new note also was 60 basis points lower than the weighted average nominal issuance yield on Australian government bonds in the 12 months ended June 2015.

The increase in the yield premium offered by the Australian market is reflected in the 10-year part of the curve, where the spread over similar-tenor US paper rose to 52 basis points. It last closed above that level in July. The 10-year yield rose as much as 6 basis points to 2.31 per cent, the highest since June 1.

"The supply from the 30-year has weighed on the market and the 10-year notes as the deal was priced," said Peter Jolly, the global head of markets research at National Australia Bank Ltd in Sydney. "While the market overall appears to have digested the supply pretty well, some weakness has seeped in. Yields have also generally been on a weaker bias and so momentum has generally not been positive for bonds."

Globally, a selloff in debt has driven up yields as speculation rises that the Federal Reserve will push ahead with an interest-rate increase this year and concern mounts that other central banks are nearing the limits of policy accommodation.

In the US, the world's deepest market, the 30-year benchmark has climbed 20 basis points this month, while Australia's 20-year yield climbed to a three-month high of 2.88 per cent.

The sale of the nation's longest-ever bond comes as offshore demand for its paper has waned. The proportion of federal securities held by non-resident investors in the second quarter fell to just 59 per cent, the least since 2009, according to official data.

The share held by foreigners peaked at 76 per cent in 2012 as investors lapped up Australian issuance even as ongoing budget deficits caused borrowings to balloon.

"The decision to issue a longer-dated bond is consistent with a strategy of lengthening the average term-to-maturity of the Australian Government's debt portfolio," Treasurer Scott Morrison said in a statement following the sale. He said this was aimed at reducing the impact of interest-rate volatility on the budget and the "strong appetite from both foreign and domestic investors" was a sign of investor confidence.

The size of the most recent offering outstrips the previous record. The nation has raised A$7 billion on three separate occasions with the latest one in May, according to AOFM data.

The 2047 bond deal was managed by Australia & New Zealand Banking Group Ltd, Citigroup Inc, Commonwealth Bank of Australia, Deutsche Bank AG, UBS Group AG and Westpac Banking Corp.

BLOOMBERG