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Bank of Queensland Sells A$1.6 Billion Mortgage Bonds

Aug. 18 (Bloomberg) -- Bank of Queensland Ltd., the regional Australian lender formed in 1874, sold A$1.6 billion ($1.4 billion) of residential mortgage-backed bonds in the nation’s biggest sale of the securities this year.

The Brisbane-based bank’s issue of so-called RMBS is the biggest since Westpac Banking Corp. raised A$2 billion in December, according to data compiled by Bloomberg. The Australian Office of Financial Management bought A$497.6 million of notes as part of a plan to support the mortgage market, said a person familiar with the matter, who asked not to be named as the details were private.

“Investors are buying a lot of short-dated RMBS and the AOFM is buying a lot of long-dated,” said John Sorrell, Sydney-based head of credit with Tyndall Investment Management, which oversees A$14 billion of fixed-income assets. “In the secondary market we’re not seeing good bids on the longer-dated paper, which makes me feel the market still has a way to recover.”

Australia’s government is spending A$16 billion buying mortgage bonds from small and regional lenders, which are more dependent on the securities for funding than national banks, to stimulate competition in the home loan market. Australia’s four biggest banks increased their share of new owner-occupier home loans to 80 percent as of the end of 2009 from 60 percent in mid-2007 after the collapse of the U.S. subprime market froze mortgage bond sales, according to the Reserve Bank of Australia.

Government Support

Bank of Queensland’s “large issue size successfully supports the regional banks’ ability to lend and effectively achieves the AOFM’s goals,” said Robert Mead, head of portfolio management at Pacific Investment Management Co.’s Australian unit, which manages A$29.4 billion in assets. “The true depth of the primary market appetite will only really be tested when a non-AOFM transaction is launched.”

Bank of Queensland priced A$960 million of notes with a weighted average life of 1.5 years to yield 100 basis points more than the one-month bank bill swap rate, according to an e-mailed statement from co-arranger National Australia Bank Ltd. A class of notes with an average 6.2-year span paid a 110 basis-point spread, the statement shows.

The weighted average life is the expected tenor of the principal outstanding to noteholders after taking into account the forecast repayment schedule of the underlying mortgage loans.

The AOFM bought all of the 6.2-year notes, according to the person. A document on the AOFM’s website says the agency planned to buy some Bank of Queensland’s notes, without being more specific, and a call to the AOFM’s office in Canberra wasn’t immediately returned.

“I don’t think the pricing on the longer-dated notes necessarily reflects where it would be if you were to look at a market without the AOFM in it,” Sorrell said.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net.

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