New South Wales Sells Record A$2.5 Billion Floating Notes

New South Wales raised A$2.5 billion ($2.6 billion) in the biggest-ever sale of floating-rate notes by an Australian state, tapping demand from banks seeking to increase their holdings of liquid assets.

The three-year securities will pay eight basis points more than the bank-bill swap rate, New South Wales Treasury Corp. said on its website. Investors submitted bids for A$3.4 billion of the debt, according to the funding arm.

Australian lenders boosted holdings of state government bonds to a record A$70.7 billion as of Sept. 30, federal government data show. Banks are favoring floating notes after regulations introduced in the wake of the 2008 global credit crunch drove up costs for Australian financial companies to hold fixed-rate bonds, according to Westpac Banking Corp.

“We will probably be seeing more of these issues from state governments going forward, given the strong demand for floating notes coming from domestic balance sheets,” said Timothy Jung, an Australian rates strategist at Westpac in Sydney. “Demand for floating-rate notes also may be increasing as anticipation grows that the Reserve Bank of Australia may have finished cutting benchmark interest rates.”

The RBA will hold the overnight cash-rate target at 3 percent on April 2, after lowering it by 1.75 percentage points since Nov. 1, 2011, according to all 28 analysts surveyed by Bloomberg News last week. Traders estimate a 51 percent chance policy makers will hold borrowing costs unchanged through September, swaps data compiled by Bloomberg show.

Swap Costs

Regulatory changes have driven up costs to swap fixed rates for floating ones, reducing the attractiveness of fixed-rate notes, Jung said. Banks prefer to receive floating rates on their assets to match their income streams from variable-rate mortgages.

Basel III rules that require banks to hold sufficient liquid assets to tide them over in a crisis will come into force at the start of 2015, John Laker, chairman of the Australian Prudential Regulation Authority, reiterated March 22 in a speech in Melbourne.

“This is the first time we have done such a large floating-rate note,” Tim Hext, the head of funding at Sydney-based Treasury Corp., said yesterday after announcing plans to sell at least A$1 billion of the April 8, 2016, notes. “We expect to see this market develop on strong demand from mostly domestic banks for this sort of product.”

South Australia raised A$2 billion last month selling floating-rate notes that mature in May 2016. Those securities pay 20 basis points above the quarterly bank bill swap rate, according to data compiled by Bloomberg.

New South Wales had raised slightly more than A$5 billion in long-term funding this financial year prior to today’s sale, according to Hext. The funding arm had said Dec. 20 it expected to secure about A$6.9 billion in the 12 months ending June 30.

The state had A$59.7 billion of bonds outstanding before today’s sale, according to data compiled by Bloomberg.