AOFM to raise $240bn in debt over year

AOFM plans to issue up to $5bn of treasury bonds and up to $4bn of treasury notes weekly until the budget in October.

AOFM chief executive Rob Nicholl

The Australian government is looking to tap global investors for $240bn over the coming financial year, as it pushes ahead with the record issuance of bonds to help fund Canberra’s fiscal response to the coronavirus pandemic.

In a speech to the Australian Business Economists group, Australian Office of Financial Management chief executive Rob Nicholl said that the AOFM would continue to issue $4bn to $5bn of treasury bonds and $2bn to $4bn of treasury notes weekly until the budget in October, where targets may be reviewed.

“Although to date we have only announced a weekly issuance rate and new maturities, the current plan for gross Treasury Bond issuance this year is around $240bn,” Mr Nicholls said.

“This will comprise about $50bn to fund maturing debt and $90bn of net new issuance.”

Mr Nicholl said the amount of debt issued will be “materially higher” than the $128bn issued last year, but that the issuance rate combined with syndications will allow the program to be “font loaded”.

“Given the potential for heightened uncertainty in the outlook, staying clearly ahead of the issuance task this year will be wise,” he said.

Mr Nicholl said that since the GFC, the AOFM decided it was prudent to keep the treasury note market open.

“Since the Treasury Note market was reopened during the GFC our reliance on it has waxed and waned, depending on various considerations that have been covered in past speeches,” he said.

“In the absence of a specific vision for this market, just keeping it open for a time of crisis has become the default, regardless of whether it was relied on regularly in the meantime.

“This is because in periods of severe stress we expect investors to retreat to positions of high liquidity, while at the same time avoiding duration risk.

Mr Nicholl also commented on the advantage of extending the yield curve – that is issuing longer dated maturities - saying that AOFM have been “deliberately extending the duration of the long-term debt portfolio, including the yield curve extension” to place the government in strong position if it had to raise money during an economic crisis.

“As of March bond lines of 13 years and longer had accommodated 12 per cent of the nominal debt portfolio,” Mr Nicholl said.

“Had that $63bn in stock been spread only out to the 10-year futures basket, the recent market congestion would have been materially greater.

“The yield curve extensions have also relieved the pressure on funding tasks by reducing the volume of debt maturing each year needing to be financed.

“The lengthening strategy commenced in 2012 has reduced the funding task over the next few years (relative to the pre-lengthening status quo) by about $25bn per year.”

On Wednesday the AOFM closed the books on a $15bn 30-year “monster bond,” bringing the total amount of debt raised by the federal government in response to the coronavirus pandemic to $197.6bn, Prime Minister Scott Morrison said on Wednesday.

Such was the popularity of the bond issue that it received $38.6bn of orders, primarily from overseas fund managers seeking secure, long-term yields.

Mr Nicholl said the fact that over half of the 2051 bond buyers were offshore investors was expected to “add to market resilience.”

“The long-end encourages a broad investor base and heightens offshore investor engagement,” he said. “Testament to this is that initial syndications for the 2047 and 2051 benchmark lines attracted about 120 and 150 participants respectively.

“This compares with about 58 on average for all other syndications.”