New 2040 index linked bond

The Australian Office of Financial Management announced its bond tenders for the week beginning 10 August 2015 and it is a sizeable one with the addition of a new $1.25bn 2040 index linked bond. Other bonds to be tendered include $900m of the July 2022 and $900m of the April 2026. There will also be a tender for $500m of treasury notes. New indexed linked bonds are not that common and while the natural buyers for these bonds are largely comprised of insurance companies and life offices, investors will be looking for clues about the market view on inflation. Index bonds adjust the capital amount of the bond by the inflation rate each quarter thus protecting the investor capital from being eroded by inflation. In April 2015 the AOFM saw the first ever inflation linked bond tender sold at a yield below the inflation level. In that tender, investors were prepared to lock in a return of 7.6bps below the official level of inflation. The outlook for inflation looks considerably different from that time and Initial price guidance for the index bond issue is a spread of 14 to 18 basis points to the yield on the 21 August 2035 Treasury Indexed Bond.