Australia chalks up record bond sale

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Australia sold a record A$11bn ($8.5bn) worth of sovereign bonds on Wednesday, continuing a hot streak of demand for government paper despite concerns over the country’s credit rating and a global sell-off in bond markets since the US election.

The syndicated sale of the 11-year bonds topped previous offerings from the Australian Office of Financial Management, which manages the country’s debt sales. The sale attracted bids totalling A$20.9bn.

“Today’s deal was supported by a very strong domestic bid,” Rob Nicholl, the AOFM’s chief executive, told FastFT.

The A$11bn face value of the deal eclipsed the previous record of A$9.3bn in January for five-year bonds which in turn surpassed the A$7.6bn sale last October of the country’s first ever 30-year bond.

The latest bonds were sold with a coupon of 2.75 per cent and were priced to yield 3.005 per cent.

Bond markets worldwide traded with a weaker tone on Wednesday as investors focused on expectations for US interest rate rises. Yields on benchmark 10-year Australian government bonds, rose as a result, up 3.5 basis points at 2.835 per cent.

Australia’s triple A credit rating from all three major ratings agencies and a benchmark interest rate higher than most major, developed economies have made the nation’s bonds a favourite among yield-hungry investors in recent years.

But the government’s failure to significantly rein in its budget deficits prompted ratings agencies last year to warn that its prized triple A-rating was under pressure.

Standard & Poor’s broke ranks with its peers in July, downgrading its outlook on Australia to “negative” from “stable” and warning “there is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.”

However, a rebound in commodity prices in recent months, even as the economy transitions away from the mining investment boom of the past decade have lifted economic data in recently weeks, raising hopes the country can avoid what could be its first technical recession in 25 years after an unexpected economic contraction in the third quarter.

While some analysts might also be concerned about the possible impact of a bursting of the country’s frothy housing market, Moody’s Investors Services said in January it expected “the policy response would effectively buffer potential shocks related to housing or external financing so that Australia’s credit profile would remain resilient.”

October’s 30-year bond sale was snapped up by ultra-long-end buyers and saw strong demand from offshore investors. That bond had a 3 per cent coupon and was priced at a yield to maturity of 3.27 per cent, while the recently issued 2021 bond, with a 2 per cent coupon, was priced at a yield to maturity of 2.24 per cent.

The AOFM confirmed in December that gross treasury bond issuance from July 2016 to the end of June 2017 is expected to be around A$100 billion, effectively unchanged from estimates issued at the time of the government budget last May.

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