The continuing global appetite for safe haven, long-dated paper was seen again last week with significant demand for the Australian Office of Financial Management's (AOFM) latest syndicated issue.
Even though it was the fourth benchmark issue from Australia since the outbreak of the Covid-19 pandemic, the office, which sells debt securities on behalf of the Australian government, saw books of A$36.8 billion ($26.2 billion) for its A$15 billion 30-year benchmark issue and which went mostly to international investors.
Previously, in mid-April, it sold A$13 billion 0.25% four-year paper; a A$19 billion 1% 10-year bond in mid-May; and a A$17 billion of November 2025s in mid-July with a whopping book of A$50.6 billion.
The new 1.75% June 2051s priced at 95.601 to yield 1.94%. This is at the tight end of the 10-year futures plus 98 basis points to 105bp guidance range.
While the majority of the AOFM’s debt issuance is conducted via tender, the office does use syndication for bonds which are significant.
“Historically the AOFM would use syndications for new lines,” one senior banker in Sydney, close to the deal, told FinanceAsia. But it also uses the process for curve extensions or tenors where they need, what the banker calls “a little bit more control on the process”.
“It's a little bit more orderly. You can leverage off the banks around where demand is and get momentum in the transaction,” he added.
The new bond has pushed out the Australian curve by four years.
The longest previous bond had been the A$7.6 billion 30-year 3% March 2047s from 2016. A record at the time, the size of the new deal reflects demand for longer tenor debt.
Although the 2047s were trading at 1.75% as the 2051s priced, this was, say bankers, coincidental.
But the 1.75% coupon on the new bonds was deliberate.
“The AOFM sets the coupon so that the bond prices at a discount. You buy A$100 million [bonds] and it costs you A$95.6 million,” said the banker.
“It's a little bit of a marketing ploy historically that has made a difference,” he added.
DEMAND FOR AAA PAPER
Demand was also driven by the fact that Australia remains one of only ten AAA rated countries in the world.
This was most recently reviewed by ratings agency Moody's, which last week, 25 July, affirmed Australia's AAA rating, based on the country's "economic strength, which reflects the economy's relatively robust GDP growth given its high-income levels, its track record of resilience to multiple shocks since the late 2000s, flexible labour and product markets which amplify the stabilising effect of a floating exchange rate and positive demographics."
As might be expected with paper of this duration, it was mostly taken up by international investors. More than two-thirds, 67% of the book went to pension funds, fund managers, banks and hedge funds.
“This part of the curve is very much something that is favoured by offshore investors,” the banker said.
The attraction for them is the steepness of the Australian curve versus that of the US dollar and British pound (buyers in Britain bought almost 23% of the book) and this is particularly so at the longer end.
The gap between the 10-year and 30-year Treasuries in the US is 68bp, according to Bloomberg. In the UK market, it is 52bp. But in Australia, it is 93bp at the time of writing and investors are taking the view that the US and European curves will continue to flatten.
There is no indication yet when the AOFM will next tap the market, as it typically doesn’t flag its syndicated issuance, though expectations are that it will be sooner rather than later.
The need for funding is partly being driven by the additional A$170 billion that has been flagged up by the government to fund historic levels of stimulus. The fiscal response to the Covid-19 pandemic in Australia has been significant with both JobKeeper and JobSeeker payments funded to support workers.
There is also an obvious desire to get ahead of schedule, both in case markets shut down again and ahead of volatility that might be caused by the US election.
“The balance, for all the global borrowers whether they're a government or supranational is between getting too much done too early and having to sit on that cash. The majority of them do try to get it out there,” the banker said.
The timing for this issue couldn’t have been better and the bond has tightened in secondary. By Friday, the bonds had traded in 6bp to 91.5bp. There was particular demand from European accounts which had seen their allocations scaled back during bookbuilding. Buying demand was also seen for the 2047s.
Joint lead managers on the deal were ANZ, CBA, Deutsche Bank, JP Morgan and UBS.
