The sale of index linked bonds is are not a particularly common form of fund raising for the Commonwealth Government but on the other hand they do come along usually at least once a month. Inflation-linked bonds issued by the Australian Office of Financial Management are securities where the capital value of the bond is adjusted for movements in the Consumer Price Index. Index linked bonds therefore offer investors a “real” yield, or a return adjusted for inflation. Normally such bond tenders pass without much comment; the amounts offered are small, typically $150 million, and much smaller than $700-$900 million vanilla bond tenders held each week.
Sometimes, though, something about the tender stands out. For instance, in September last year, the AOFM sold November 2018 index linked bonds at a negative yield meaning that the buyers were locking in a return below the rate of inflation. Such behaviour may occur when people think this is the best outcome in a world where the alternatives are worse and therefore a negative yield indicates a level of anxiety about economic conditions at the time.
The unusual thing about this week’s latest indexed bond tender is the fact it was swallowed up wholly by one bidder. There were 42 bidders, lodging bids worth a collective $542 million and their bids ranged from a real yield of 1.175% to that of the successful bidder, a real yield of 1.005%. These inflation-linked bond tenders typically attract a good level of interest and coverage ratios are typically on the higher side. Buyers of index linked bonds tend to be life offices and insurance companies with matching liabilities.