The Australian Office of Financial Management (AOFM) has issued a benchmark 30 year government bond – its biggest ever offering. The new issue was massively oversubscribed, a shot of confidence for the market
The new government bond, extending out until 21 March 2047, has raised A$7.6bn in a record deal. The issue was scaled back due to massive demand of around A$13bn. According to the AOFM, the bond is priced to yield 3.27%, 101.5 basis points (bps) over the 10 year bond future rate.
The bond further extends Australia’s yield curve ahead of the AOFM’s 2039 maturity bond issued a year ago,– now more comparable with other sovereign issuers. Domestically it signals a positive outcome for Australia’s evolving debt market, which continues to mature.
In regards to the 30 year bond, AOFM CEO Robert Nicholl made the following comment:
We are confident that domestic investor support and the so-called ‘global search for yield’ that has underpinned an increased demand for duration will remain sufficient for us to establish a 30-year Australian yield curve.
The 30 year bond will also assist corporate bond issuers to borrow for longer terms as the government bond benchmark has extended out to 30 years.
Most corporate bonds have terms up to 10 years. Over time, we expect companies to issue longer dated corporate bonds which could present investors with higher returns, as they would get paid more for investing for longer terms.
Overall, the bond has met great interest, with demand “likely to have come from insurers, traders, and offshore and local investors”, as quoted by the Australian Financial Review.
FIIG CEO, Mark Paton also commented:
Longer dated bonds at higher yields will likely increase participation by domestic and offshore investors in our capital markets, further supporting liquidity.
Australia’s curve extending deal is still catching up to the rest of the world. The rates strategy team at ANZ Research made the following statement:
Several sovereigns have come to the market with curve extending bonds: earlier this year Ireland issued a 100 year bond (2.35% April 2116), Belgium issued a 2.3% May 2116 bond and Spain issued 3.75% June 2066 and 3.45% July 2066 bonds.
Interestingly, last week Italy also issued a 2.8% 50 year bond, with investors purchasing five billion euros (US$5.6bn) of the securities. Other global markets have also issued longer term with low yields, such as the German 30 year government bond yielding 0.68%, and Swiss 30 and 50 year government bonds yielding 0.07% and 0.11% respectively. With yield hungry investors frustrated by near zero rates in major bond markets, it’s no surprise that Australia’s 30 year issue, at 3.27%, has been so successful.
Pricing details for the 2047 maturity government bond are as follows, accurate as of 12 October 2016.
Issuer name: Australian Office of Financial Management (AOFM)
Volume: A$7.6bn
Total outstanding in this line: A$7.6bn
Coupon type: fixed
Coupon rate: 3%
Issue/re offer price: 94.820% (plus 0.232% accrued)
Issue yield: 3.27%
Margin to EFP: 101bps
Maturity: 21 March 2047
Sources: Australian Financial Review, BankingDay, Bloomberg, FIIG Securities and KangaNews