Demand for bonds remains strong. The is hardly surprising. Australia’s relatively lower fiscal deficits compared with other developed markets (resulting in lower relative bond supply), and ongoing constraints on consumption due to high household debt levels and tax burdens, many managers view Australian duration as attractive relative to many other developed market alternatives.
As an indication of market appetite, this week the Australian Office of Financial Management (AOFM) launched a new government bond issue with a March 2036 maturity and, according to the AFR, received a massive $84 billion worth of bids from commercial and central banks, fund managers and hedge funds. The offer was almost 6 times oversubscribed – a record.
The fact that the offer was almost 6 times oversubscribed comes down to two additional factors: expectations the RBA will cut official interest rates this month; and a flight to safe-haven assets amid fears President Donald Trump will spark a damaging global trade war.
It is also worth noting regarding broader market demand (largely retail in this case) that during the week Pimco announced 4 new bond ETFs, reinforcing the sector’s appeal and increasing range of products available for retail investors. We note that historically Pimco Australia has been very conservative in issuing fixed income products to the retail market (at least listed products), having previously pulling a proposed fixed income LIT, so we view this development as significant in that it speaks to increasing Australian retail investor demand and asset class understanding.