Plans for the issue of the Australian government’s first 30 year fixed rate bond have finally come to fruition. Today, the Australian Office of Financial Management (AOFM) announced it had issued bonds worth $7.6 billion in face value terms with a maturity date March 2047. The bonds were priced with a yield to maturity of 3.27% (or EFP + 101bps) and reported to have attracted over $13 billion of orders.
The AOFM made its intentions of extending the Australian Commonwealth yield curve public in May 2015 but little occurred until August this year when the possibility re-emerged. That possibility resolved into a certainty when the AOFM mandated local and foreign banks to arrange buyers of the bonds yesterday.
There has been talk this bond sale led some investors to sell out of other long-dated bonds in order to finance taking part. 10 year and 20 year bond yields have been rising around the world but comparable yields in Australia have moved further, steepening our yield curve. Perhaps with this in mind, the AOFM said there would be no further issuance prior to March 2017, signalling to bond holders there would not be a need to make switching arrangements for some time but also to allow the new benchmark sized issue time to settle in secondary market trading.
The new bonds will be a boon for insurance and life offices which have long term liabilities and struggle to find matching assets. It is highly likely many of these bonds will be tucked away in portfolios never to see the light of day. Nearly 70% of the bonds were purchased by investors defined by the AOFM as asset managers, insurers and pension funds.
There has been a concerted push for Australia to lengthen its debt profile with interest rates at or near record lows. Many countries have already done so, including Mexico and Ireland, both of which issued 100 year bonds in the past 18 months. It makes sense for governments to borrow money for long periods at low rates and yield-hungry investors have been keen to snap up sovereign debt, almost at any price.
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