Real yields up for latest indexed bond

The new 1.25% 21 August 2040 Treasury Indexed Bond has been priced. The $1.25bn issue kicked off a big week of ACGB issuance with several large tenders set to be held. Index bonds have the capital amount adjusted each quarter by the level of the CPI thus protecting investor’s capital from inflation. When bidding for index bonds, investors bid the yield that they will receive above inflation, the ‘real yield’. The new indexed bonds went at a real yield of 1.245% which is materially higher than the 0.58% real yield on the 2035 indexed bonds issued in April this year. Readers will recall the mid-April tender of 2018 indexed bonds which were auctioned at a real yield of -0.0763%. This was the first time in Australia that investors had bid for index bonds and locked in a return below the level of inflation. April was the height of global concern about deflation and a period when a large percentage of bonds in Europe were trading at negative yields.