News

The CEO of the Australian Office of Financial Management (AOFM), Rob Nicholl, told an audience in Sydney that Australian government bonds with a 30 year tenor could be inevitable in a speech covering the progress and expectations in developing the ACGB market. The AOFM is “open to the prospect of a further curve extension, including to 30 years”. The AOFM has been lengthening the average maturity of government debt from 5 years to 6.5 years since 2010. Nicholl said longer bonds help to “insulate the budget from the near-term impact of rising yields…Rising future yields will only impact the marginal cost to government of future issuance, not the cost of the stock that has already been issued.” Demand for longer bonds has come from “insurance and pension funds, together with some large fund managers, both domestic and offshore that has made it possible for the AOFM to sustain a longer issuance bias.” He indicated that the AOFM was optimistic that the recent announcement of a 20 year futures contract would help promote liquidity and prompt semis and corporates to issue long-dated paper.

Business investment spending plans in the USA improved for the second month in row in April, according to the Commerce Department.  Non-defense capital goods orders excluding aircraft were up 1.0% in April after an upwardly revised 1.5% increase in March.

On Friday the ASX carried an announcement that Australian National Proteins Limited hoped to issue $50m worth of senior unsecured bonds for 7y with a fixed coupon of 7.5% and that the issue was being arranged by ICBC Capital Pty Ltd. ICBC Capital is a corporate adviser based in Perth that trades under the name Komodo Capital Pty Ltd and appears to have no connection with ICBC the large Chinese bank. Australian National Proteins is also something of an unknown quantity. According to Philip Bayley, writing in the DCM Review, “Most of the board of AYB was turfed earlier this year” and Bayley reveals that, “AYB’s 2014 annual accounts show annual revenues of less $2m and a loss of $8m for the year. It also has accumulated losses of $15.6m, total assets of $2.6m and shareholders’ funds of $2.3m. AYB’s latest interim accounts show it is continuing to lose money and it has wiped out its shareholders’ funds.”

China’s yuan is no longer undervalued and the government should head towards “a floating exchange rate”, the IMF says. “Our assessment now is that the substantial real effective appreciation over the past year has brought the exchange rate to a level that is no longer undervalued,” the IMF said.

Two weeks ago we reported that Asciano tapped the 10y bond market to raise $350m at a 4.8% yield to maturity. Following this, bond dealer FIIG has begun offering the bond to wholesale investors in $10,000 parcels under its Direct Bond service.  Under this service, FIIG, holds the minimum nominal size of the bonds ($500k) under its custodial service and issues smaller parcels (or the rights to smaller parcels) to investors. The Asciano bond is one of the highest yielding Australian investment grade bonds available at the moment but investors should ensure they understand the holding structure for the bonds and whether this entails any additional risks on top of the company credit exposure.

Moody’s says that the State of Tasmania’s FY2015/16 budget indicates that robust revenue growth is projected to spur significant improvements in its financial performance both this fiscal year and over the medium term. Owing to large gains in GST commonwealth grants, and to a lesser degree higher tax income, deficits are set to narrow considerably, and the state is forecast to move into a surplus position by FY2018/19, a credit positive development for Tasmania. For FY2015/16, the state budget projects a general government sector deficit of $157 million, equal to 3.0% of revenues, which is below the estimate projected last year for FY2015/16 of $214 million or 4.2% of revenues. The better result is bolstered by a forecast sharp rise of 15.3% in GST-backed grants over the prior year due to both an increase in Tasmania’s share of these grants and the growth in the total size of the grant pool. Moody’s allocates long-term debt and issuer ratings of Aa1 to Tascorp.

RBA deputy governor, Philip Lowe, gave a speech last week that outlined the importance of maturity transformation or transforming illiquid long-term assets into shorter-term liquid assets and said, “The best, and most obvious, example, of this type of transformation is an at-call bank deposit…The holder of a deposit has a completely liquid claim on the bank. The full face value of the deposit can be drawn on at any time, for any purpose. Yet deposits are primarily invested in assets, namely bank loans, which, typically, are not particularly liquid and have long maturities.”

Lowe also discussed other forms of maturity transformation including that done by investment funds, which provide money at-call or near to at-call but invest in comparatively illiquid assets. Lowe made five core points including: ensuring investors understand the nature of the liquidity promise being made, the need for clarity in the process for freezing redemptions, the need for separation between bank-managed investment funds and the bank owners, the need for frequently updated pricing on investments, past runs on investment trusts and the freezes that followed did not lead to systemic problems in the financial system. In neither of the cases highlighted by Lowe was there a significant fire-sale of assets.

The Tasmanian budget showed a general government operating deficit of $58.5m for 2015-16, better by $75m than forecast last budget. The overall fiscal deficit of $157.1m, $50m better than before. Total state sector net debt is expected to rise from $529m Jun-15 to $740m Jun-16 so new borrowing requirement of around $210m. There are no maturities in 2015-16, so another quiet year of issuance is expected.

President of the Fed of St. Louis, James Bullard, has said the reserve should lift rates as the economy improves and said that continuing to depress rates risks inflating asset-price bubbles. “We need to get going once we have the opportunity to get going … The economy is getting back to normal, but policy is still on an emergency setting,” he said. “I want to see the data for June and I can make a judgment when I get there,” he said.

San Francisco Fed president John Williams said the Fed will probably lift rates this year as the economy rebounds from a weak Q1. A rate decision “is on the table in every meeting,” he said.