Every week the AOFM issues Treasury bonds and notes via a tender system to raise funds for the Commonwealth Government. In recent years, typically there would be two bond tenders and one note tender each week, with some variations along the way. Most of the time it is to issue an existing line of bonds or notes but as bonds have a finite life and come to an end, every so often a new line of bonds will be issued.
Quite often when a new line is issued, it is not via a tender but via a syndicated process. This is where a syndicate of banks will individually find investors willing to purchase the new bonds. A market-clearing yield is negotiated and the bonds are issued.
This is what happened this week. On Tuesday the AOFM announced it would issue by syndication a new 0.75% November 2027 Treasury Indexed Bond of a benchmark size. “Benchmark” issues are always the largest issues by value as both issuers and investors want a liquid security and size helps in this regard. On Wednesday, a syndicate which comprised Citi, Deutsche Bank (Sydney), UBS (Australia) and Westpac Institutional Bank had lined up investors and $3 billion worth of these index-linked bonds (ILBs) were issued.
They are called index-linked bonds or “linkers” for short as the face value is linked to CPI and adjusted every 3 months. As they are inflation-adjusted, their 0.8725% yield is “real” and not “nominal”.
Most investors in these latest ILBs are domestic and that is generally true of all AOFM bond issues. Fund managers account for the majority of purchasers by value but in recent years banks’ trading desks have been taking on more ILBs. While there has not been a lot of ILB issues, until 2015 trading desks would take around 10%. Now it is more like 25-30%.