Australia has signalled its confidence the global scramble for yield still has momentum with a plan to sell its first 30-year bond.
The government in Canberra joins South Korea in trying to lock in lower borrowing costs while tapping the appetite of investors grappling with a fixed-income universe in which more than $13tn of debt carries negative yields.
Rob Nicholl, chief executive of the Australian Office of Financial Management, which sells the country’s debt, expects to be able to issue a “meaningful volume” to meet anticipated demand and to “establish a maturity of clear benchmark size”.
Despite being driven to record lows this year, yields on top-rated Australian sovereign bonds are still higher than elsewhere in developed economies, particularly in Europe and Japan where central banks have introduced negative rates.
Australia is “confident that domestic investor support and the so-called ‘global search for yield’ that has underpinned an increased demand for the duration will remain sufficient for us to establish a 30-year Australian yield curve”, Mr Nicholl said in a speech in Sydney.
However, Australia does face a challenge retaining its triple A credit rating and signs that demand from overseas buyers is ebbing.
With investors still expecting the US to raise interest rates again this year and the Reserve Bank of Australia cutting borrowing costs to a record low, the gap in yield between 10-year Treasuries and their Australian counterparts is one reason why the latter “could lose some lustre for foreign investors”, according to analysts at ANZ Banking Group.
The spread between the yields has narrowed from almost 1 percentage point in February to 42 basis points today.
At the end of June, foreign holdings of Australian government bonds — measured as a share of the market value of the bonds outstanding — fell to 59.4 per cent, the lowest level since the June quarter of 2009. That is down from a peak of 78 per cent in 2012.
A possible downgrade may also be weighing on the minds of overseas buyers after S&P Global Ratings in July placed Australia’s triple A-rated debt on “negative outlook” following a closely contested federal election that could delay plans for fiscal reform.
However, Moody’s Investor Services in August affirmed Australia’s triple A credit rating and also kept its “stable” outlook intact.
And Australia has other tailwinds as it pushes to sell its longest bond. There remains strong appetite for longer-dated assets from pension funds trying to better match their investments with their liabilities, which has also spurred a variety of countries to issue longer bonds.
In addition to regular sales of 50-year debt by the UK, Europeans borrowers including Belgium and Ireland have issued 100-year, bonds. In Asia-Pacific, Japan is reportedly considering selling 50-year debt for the first time while bankers have also been pitching 50-year sales to investor-favoured governments such as Indonesia, though as yet to no avail.
Bond issuance is, however, subject to fashion just as much as other asset classes. The US suspended its benchmark 30-year bond programme in 2001 but worsening budget deficits and market lobbying led to their reinstatement in 2006.
Mr Nicholl was guarded about details such as expected pricing.
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