Investors endorse the new 30-year Government Bond sale

Summary

  • The federal government announced that the government debt would be above $850 billion, while the budget deficit would reach a record $184 billion mark this year.
  • Bond market investors are expected to back the government’s 30-year bond sale next week.
  • Australia’s 30-year bond yields 1.748% is higher than 30-year long bonds of the UK, Japan, and Canada that are below 1%.
  • Higher long-term interest rates on Australian bonds and lower debt to GDP ratio than global nations, as well as AAA rating of the country have attracted international investors to lend money to them.

Australian government debt has been negligible to practically nothing for decades, but the scenario does not seem to be the same anymore. The country’s response to coronavirus has pushed its budget deficit to $85.8 billion for the last financial year ended last month, much above when compared to Treasury’s previous estimate of $5 billion surplus.

Australia’s budget deficit is forecasted to swell to record $186 billion in 2020-2021, biggest since World War 2, for the current financial year. Debt rates rose through the Great Depression of the 1930s, and after the World War 2, Australia found itself heavily in debt to the tune of 120% of GDP, much higher than Treasury’s forecasts for 2020-2021.

Also, Australia is currently in a much stronger and resilient position than other countries that started with significantly higher debt levels than Australia.

The debt flood comes after forecasts that Australia would record a huge deficit, for which the government is raising capital through bond sales. The Australian government sold $17 billion of new 2025 bond line, while drawing bids worth $50.6 billion on 14 July.

Another prospective mega-deal of 30-year bond sale is due next week, after the government confirmed the total debt is expected to blow out over $850 billion.

AOFM Issuance Program

As per The Australian Office of Financial Management (AOFM), Treasury Bond issuance stood at $128.2 billion for 2019-20, while Treasury-Indexed Bond issuance was $1.65 billion.

The issuance guidance has stated that:

  • New Treasury bond lines maturing in 2025,2026, 2031and 2032 would be formed by syndication in 2020-21.
  • A new 30-year Treasury bond line due to mature in June 2051 would be formed by syndication prior to 30 September 2020, subject to market conditions.
  • The new 2051-line launch will be at priority and AOFM is supposed to notify about the unveiling of a new line at least 10 days before.
  • Treasury bond issuance to be at the rate of around $4-5 billion in most weeks.
  • 2 Tenders of $100-200 million each will be held in most months for the issue of Treasury Indexed bonds, while Treasury note issuance will vary as per AOFM’s cash management needs.

The Australian Office of Financial Management is accountable for the supervision of Australian Government debt and certain financial assets.

The AOFM intends to address the funding requirements of the government in a cost-effective way, subject to reasonable risk, and also to satisfy the policy goals of the government in order to ensure liquidity and well-organised Treasury Bond and Treasury Bond futures markets. It seeks to ensure that the government fulfils its budgetary commitments when they are due and try to reduce the total cost of funding in managing the cash flows of the government.

There is a queue of businesses and individuals who have lined up to buy Australian government bonds as they are sure that the country would not default. A string of record bond sales that have attracted high demand at ultra-low interest rates, eased early fears that AOFM could not succeed to raise the funding needed to finance the massive spending.

Australian bonds are much more attractive than global counterparts

Bond sales are supported by high long-term interest rates on Australian bonds compared to short-term bonds. Australia’s 30-year bonds yield is around 1.748 points, 15-year bond yields 1.225 points and 10-year bond yield stood at 0.884 points (as on 27 July, AEST 18:31).

Long term interest rates on Australian bonds is relatively higher than its international counterparts. The US 30-year bond yield is at 1.212 points, the UK 30-year bonds yield is at 1.212 point, while Japan 30-year bonds yield is at 0.572 points. Moreover, German bonds have gone into negative territory with its 30-year bonds yielding -0.061 points (as on 27 July, AEST 18:32).

Australian bonds are also viewed as desirable because its predicted debt to GDP ratio of 45% is well below other developed markets. The country remains one of the least indebted nations as almost every other country has overhauled its borrowings to survive with the pandemic prompted the shutdown.

Australia is also one of the 11 nations to get AAA credit rating, which even the US lacks. This is why foreign investors rushed to lend in Australian government’s $17 billion raising on 14 July. Hence, international investors are quite keen to lend money to Australia.

Further, the AUD/USD pair also gained 0.43% to 0.7134 on 27 July (at the time of writing) as the dollar fell due to rising tensions between the US and China.

Further, the enlarging gap between the US Treasury yields and Australian bond yields also contributed to AUD’s rally against dollar as RBA rejected the likelihood of negative interest rates and Governor Philip Lowe’s statement of currency being aligned with economic fundamentals.

Also, household debt and weak wage growth remains Australia’s major issues. The labour market shock can act as a deterrent to household consumption and debt-servicing capacity of the country, which further affects the country’s rating.



 


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