Longest Bonds Since 1984 Raise Record Demand: Australia Credit

Australia sold its longest-maturity government bond since 1984 with investors purchasing more than twice as much as in any previous offering and the government locked in yields at about a 2 1/2-year low.

The A$3.25 billion ($3.3 billion) of bonds sold was the largest amount on record, data from the Australian Office of Financial Management showed and excluded A$10 million taken up by the Reserve Bank. The 4.75 percent note maturing April 21, 2027, was priced to yield 4.88 percent, the AOFM said today in a statement. Similar U.S. Treasuries yield 2.7 percent.

“In our experience, when bonds get above A$3 billion they no longer have an issue premium where they stay cheap for a little while,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “Clearly there’s been good demand for the issue.”

While Australian 10-year yields have risen about half a percentage point since Oct. 4, they are still more than a percentage point below the past decade’s average of 5.52 percent, as investors including life insurers seek longer-maturity debt to match investments to future obligations. Investors are demanding higher payments as Australia’s economy shows signs of strengthening.

Syndicated Sale

The 2027 bond is the first non-indexed security to be sold through a group of banks rather than at auction, the Canberra-based AOFM said yesterday. There will be no further issuance of the bond until at least February 2012, it said.

Citigroup Inc., Deutsche Bank AG and UBS AG managed the offering, while Australia and New Zealand Banking Group Ltd., Commonwealth Bank and Westpac assisted them, the AOFM said.

“The sale received some very strong support, predominantly from domestic accounts, with a good mix of investor type,” said James Arnold, Sydney-based director of capital markets origination at Citigroup.

The 2027 note is the only sovereign security to yield more than the Reserve Bank of Australia’s 4.75 percent benchmark rate, the developed world’s highest. All securities out to the 2023 note, which was yielding 4.57 percent today, have had rates less than the benchmark since Aug. 9.

Australian government debt lost 0.8 percent this month, paring the gains that made the securities the best performers among advanced economies in the 12 months ended Sept. 30. The bonds returned 9.6 percent over the past four quarters, surpassing all 25 other markets tracked by Bloomberg/EFFAS indexes.

Foreign Demand

“Yields in the Australian market have risen quite a lot in October and the cheapening up in price is something that will make it easier to attract foreign demand,” Adam Donaldson, head of debt research at Commonwealth Bank of Australia, the nation’s largest lender, said yesterday. “The challenge for an issuer at the moment is that the investor base is wary of bonds being too expensive.”

Investors including life insurance companies, both in Australia and overseas, will have an “appetite” for bonds of longer maturities, Donaldson said. The debt may also lure money managers seeking alternatives to U.S. Treasuries, he said. Australian 10-year notes yield 2.28 percentage points more than U.S. government notes of similar maturity, up from the low this year of 1.92 percentage points in August.

Offshore investors held 75 percent of Australia’s bonds as of June 30, data from the central bank and statistics bureau show. Turnover in government bonds from overseas central banks rose to more than A$56 billion in the 12 months ended June 30, from A$5.8 billion two years earlier, the 2011 Australian Financial Markets Report showed Oct. 5.

Long-Term Investors

“Long-term investors will welcome” the Australian bond, said Hideo Shimomura, who helps oversee the equivalent of $78.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “It offers investors a chance to lock in a longer-term investment and will help the government compete with the U.S., Germany and Japan for funds.”

Shimomura, who spoke before the sale, said he would consider buying the security once it starts trading in the secondary market.

The U.S.’s longest bond matures in August 2041, while Germany has a July 2042 security and Japan has a March 2051 issue.

Corporate Benchmark

The new bond will help to create a long-term pricing benchmark for the corporate bond market and groups looking to issue long-term infrastructure bonds, Australia’s Treasury said in a statement yesterday. It will also provide a safe investment for annuities, according to the statement.

Corporate bond risk rose today as a Franco-German split on the role of the European Central Bank in leveraging the euro bailout fund emerged yesterday. Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, indicated an impromptu meeting of European leaders in Frankfurt last night failed to resolve differences.

The Markit iTraxx Australia index increased 4.5 basis points to 187.5 basis points as of 11:55 a.m. in Sydney, according to Deutsche Bank AG. That’s on course for the biggest daily gain since Oct. 4, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

1984 Sale

The December 1984 sale of A$251 million of 13 percent securities that matured Dec. 15, 2000, had a weighted average yield of 13.59 percent at issue, AOFM data show. Investors on average bid for 2.37 times the amount of bonds offered.

The so-called bid-to-cover ratio declined to 2.79 at the most-recent sale of 2023 bonds on Aug. 3, from 3.44 at the previous auction on July 13, according to the AOFM.

Benchmark 10-year government bond yields were at 4.43 percent after falling below 4 percent on Oct. 4, the least since January 2009. The rate has risen 21 basis points since Sept. 30, threatening to snap a record stretch of monthly declines.

Yields have fallen for nine straight months, the longest stretch since at least 1978, amid signs Australia’s economy can withstand turmoil in Europe as China continues to demand its commodities including iron ore and coal.

The Australian dollar, the world’s fifth-most traded currency, traded at $1.0174 at 5:30 p.m. in Sydney and reached $1.1081 on July 27, the strongest since it was freely floated in 1983.

Trade, Unemployment

The nation’s exports surged to A$28.4 billion in August on coal shipments, and the A$3.1 billion trade surplus was the second-widest on record, the Bureau of Statistics said Oct. 4. The unemployment rate declined last month for the first time since March as employers added double the workers economists forecast, a report showed Oct. 13.

Futures contracts showed bets the cash rate will be at 4.32 percent by December in trading today, after they indicated 4.35 percent on Oct. 17, the highest expectation since Aug. 2. They signaled rates as low as 3.47 percent on Aug. 9.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer prices will rise an average of 2.48 percent for the next five years. The lowest estimate this year was 2.37 percent on Oct. 4.

“Longer-dated bonds would be particularly attractive to overseas investors both for outright yield and the fact that these bonds would line up with other developed markets such as the U.S. and U.K. for people with longer-dated liabilities,” Tony Morriss, head of interest-rates research in Sydney at ANZ Bank, said yesterday.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE