“Today’s result is in no way a default by the Commonwealth of Australia.”
The AOFM, as the Commonwealth Government’s financing arm, regularly sell bonds to finance the Government’s budget deficit and to refinance maturing bonds which were used to finance past deficits. Therefore, it sells a lot of bonds, usually on a weekly basis.
In the past, YieldReport has made references to the AOFM’s reputation for knowing the state of demand for its Treasury bonds. The AOFM is known for getting on the telephone with its contacts in the market and not being unpleasantly surprised by the results of its tenders. When the value of bids in one of its tenders is not a great deal higher than the value of the bonds being sold, regular observers will not be perturbed especially because the AOFM was aware of the level of demand in advance, anyway.
However, one of the AOFM’s tenders held this week raised a few eyebrows. The tender was not held for the sale of Treasury bonds which may have maturity dates which are 5, 10 and 20 years or longer in the future. The tender in question was one of two tenders held on Thursday to raise a total of $1.5 billion via short-term Treasury notes. Treasury notes are for much shorter periods and they typically mature about 90 days or 180 days after they are issued.
$1000 million January 2020 notes were put out to tender, along with $500 million April 2020 notes. Investors’ bids of $936 million and $2.514 billion were received for the January and April notes respectively. Obviously, all the April notes were sold but there was a shortfall of bids in the January series.
The coverage ratio of the tender January notes was less than 1. Going back to July 2000, there has not been a note tender held in which the coverage ratio has been less than 1.
Just minutes after the tender results were published the AOFM made a statement. Amongst other things, the AOFM was keen to state it was not about to run out of money. “Treasury Notes are used as a cash management tool and the AOFM has considerable flexibility around the timing and volume of future Treasury Note issuance. This is because the AOFM maintains a precautionary liquid asset balance in excess of forecast needs at any point in time.”