Australia’s $5 billion jumbo bond takes off with help from foreign demand

By: | Published: May 12, 2016 1:38 PM

The Australian government raised a record-matching A$7 billion ($5.14 billion) in a new issue of 12-year debt, with one third sold to international investors attracted by the bond's relatively high yield, it said on Thursday.

Australia News, Australia Latest News, Australia Economy NewsThe Reserve Bank of Australia (RBA) last week cut rates to a record low of 1.75 percent and markets are fully priced for another easing this year. (Reuters)

The Australian government raised a record-matching A$7 billion ($5.14 billion) in a new issue of 12-year debt, with one third sold to international investors attracted by the bond’s relatively high yield, it said on Thursday.

Australia’s AAA credit rating remains a big draw for investors from central banks to sovereign wealth funds which together hold around 65 percent of Australia’s A$422 billion debt. Australia is one of only 10 countries boasting a top-notch rating with a stable outlook.

The new bonds, maturing in May 2028, will pay a coupon of 2.25 percent to yield 2.525 percent. This equates to a margin of 20 basis points over the 10-year futures contract.

“In global terms, we are still above other sovereign bonds,” said Robert Nicholl, chief executive officer of the Australian Office of Financial Management (AOFM), the government funding agency, referring to the sub-zero rates of many nations in Europe and Japan.

This is why analysts forecast the Australian dollar to remain supported in the long-term even though the outlook for interest rates is dovish.

The Reserve Bank of Australia (RBA) last week cut rates to a record low of 1.75 percent and markets are fully priced for another easing this year.

While the Australian dollar has tumbled around five U.S. cents in three weeks to be last at $0.7336, it remained well above 65 cents, a level recently suggested by an RBA board member as more appropriate for the economy.

The new issue order book went above A$11 billion with around 80 investors participating in the offer, Nicholl said.

In 2014, Australia raised two A$7 billion issues with maturities of 2026 and 2037.

Around 70 percent of the new issue was sold in Australia, with 9 percent distributed in Asia, 8 percent in Britain and the balance elsewhere.

Many foreign investors buy Australian government debt in the secondary markets.

By investor type, the AOFM said fund managers bought around one third of the offer, with banks’ trading desks taking another third.

Around 14 percent was sold to banks for balance sheet purposes, while 14.5 percent was placed with hedge funds.

Less than 8 percent was distributed to central banks with the rest sold to diverse buyers. The offer was jointly managed by Citi, Commonwealth Bank of Australia, Deutsche Bank and UBS, the AOFM said.

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