Australian government to issue 30-year bonds

The Australian government’s inaugural 30-year bond issue aims to cut funding risk by billions of dollars.

The decision will bring Australian bond offerings in line with those of other developed market countries.

The Australian government will issue its first ever 30-year bond in a bid to shave off billions dollars in funding risks, despite offshore demand for local treasuries falling and as traders confront concerns around the sustainability of global quantitative easing programs.

The dive into longer-dated funding instruments was unveiled on Tuesday by Australian Office of Financial Management chief executive Rob Nicholl, who detailed the department’s plan to push debt maturities out further into the future in a speech to economists in Sydney.

Extending the date of bond maturities saves the country billions in funding risk. The AOFM, which is responsible for issuing Australia’s debt, has already lengthened the average maturity of its debt book to seven years, up from five years, in the process slashing around $12 billion a year from the country’s annual funding risk over coming next five years.

The new benchmark 30-year Treasury bond will be issued next month, subject to market conditions, and will mark a significant extension of the current bond curve which extends to 2039 with a 23-year bond.

The move, which will reduce the impact of interest rates changes on the government’s debt bill, also brings Australia in line with other developed countries.

Despite offshore demand for Australia’s sovereign bond market falling in recent years, with the proportion of offshore ownership slipping from 78 per cent to 60 per cent, Mr Nicholl said he was confident local yield-hungry investors would pick up the slack.

“We are confident that domestic investor support and the so-called ‘global search for yield’ that has underpinned an increased demand for duration will remain sufficient for us to establish a 30-year Australian yield curve,” Mr Nicholl said.

“We are expecting to be able to issue a meaningful volume to meet anticipated broad interest and to establish a maturity of clear benchmark size,” he said, noting that issuing longer-duration bonds regularly “will be beneficial”.

JP Morgan chief economist and head of Australian fixed income Sally Auld said bonds with a 30-year duration had been a hot topic of debate in recent years, as Australia lacks a policy tool which forces asset managers to buy lengthy bonds.

“Uncertainty around the durability of end user demand has always been cited as the main reason not extend the yield curve,” Ms Auld said. “Unlike the UK for example, there is no legislative requirement for insurers or pension funds to hold long duration paper.”

Mr Nicholl attempted to downplay those fears today, saying that demand from offshore investors was failing to keep up with the government’s current borrowing habit.

“Net offshore buying continues steadily – although we do experience periods of notable net selling – but the rate at which offshore buying has increased over the past few years has not met the rate of increase in our issuance,” he said.

Ms Auld said the upside of a 30-year bond issue may be that it potentially entices a new group of offshore investors into the Australian treasury market, encouraging further diversity of the investor base.

But she warned the extra supply of long-dated bonds “comes at a time when global fixed income markets still remain vulnerable” with wild volatility gripping many bond markets and as traders are are confronted by the possible end of large quantitative easing programs in Europe and Japan.