Canberra goes long in $5bn bond issue

CANBERRA has moved to take advantage of cheap funding by raising billions through the issue of a new 20-year bond to global investors.

CANBERRA has moved to take advantage of cheap funding by raising billions through the issue of a new 20-year bond to global investors.

Joint lead managers ANZ, Citi, UBS and Westpac Institutional Bank were last night marketing the issue to international investors on behalf of the Australian Office of Financial Management.

The Treasury bond issue, due to be priced this morning, was expected to be of benchmark size, implying that it was likely to raise more than $5 billion for the government, analysts said. Maturing in April 2037, it is the longest-term bond issue of its kind in Australia.

The AOFM has been steadily lengthening the average duration of its borrowings amid ultra-low interest rates in the wake of the global financial crisis. With pricing guidance pointing to a yield of about 4 per cent, the new bond was expected to be very attractive to international investors.

US Treasury bond yields hit a 16-month low of 2.28 per cent earlier, even as the Federal Reserve neared the end of its latest bond-buying program.

“What we are seeing overall among global issuers is a desire by governments to extend the maturity of their borrowing profile, primarily to take advantage of low interest rates, but also because it sits well from a macro-prudential standpoint,” said Patrick Perret-Green, senior interest rate strategist at ANZ. “If you extend the average life of your debt, you reduce your refinancing risks.”

Superannuation funds locally and overseas have been hunting down longer-dated investments in recent years to match the lengthening profile of their liabilities. Japanese investors in particular were expected to snap up the new long-dated Australian bond issue after peripheral European bond yields collapsed this year amid slowing economic growth and inflation.

“Certainly from a global perspective, the aging population is fuelling solid demand for long-dated assets, and from the perspective of an international portfolio manager, AAA –rated Australian paper of this maturity is very attractive versus equivalent US and UK government debt yielding about 2.8 per cent and German paper yielding around 1.7 per cent.”

The Australian government had increased the average maturity of bonds outstanding from 5 per cent in June 2008 to 6 per cent as of June 2014, an AOFM spokesman said.

Westpac chief interest rate strategist Damien McColough agreed that demand for Australian government bonds likely to be accentuated by low interest rates offshore, as well as a recent pullback in the Australian dollar.

“Australia has the highest AAA-rated bond market in the world by a long way and there is a big pool of liquidity that is being generated largely by extraordinary policy measures by the major central banks,” he said.