Photographer: Brendon Thorne/Bloomberg

Australia's 30-Year Bonds Are a Treat for Yield-Hungry Debt Investors

  • Nation’s longest nominal bond is currently June 2039 security
  • Follows gradual lengthening of curve from less than 15 years

Yield-hungry debt investors are in for a treat. Australia’s decision to extend its bond curve out to 30 years for the first time means the highest interest-rate available from a major developed sovereign market is about to get even more appealing.

It’s one of the few such countries that doesn’t already issue debt of that tenor and the Australian Office of Financial Management is betting the global hunt for yield will ensure investors are keen to snap up the new security it plans to sell next month. The longest bond currently on issue from the South Pacific nation -- due in 23 years -- yielded 2.91 percent as of 8:40 a.m. on Wednesday in Sydney, and the new longer one announced by the government funding arm is likely to have a higher yield than that.

The AOFM’s announcement on Tuesday comes even after the recent selloff in bond markets that has helped pushed yields up from historical lows. Record monetary easing from Japan to Europe has driven down interest rates around the world and encouraged investors to seek out higher yields wherever they can find them. The Australian 10-year benchmark was at 2.13 percent, having climbed from a record-low 1.81 percent set in August.

Right Time

“We are confident that domestic investor support and the so-called ‘global search for yield’ that has underpinned an increased demand for duration will remain sufficient for us to establish a 30-year Australian yield curve,” AOFM Chief Executive Officer Robert Nicholl said at an event in Sydney on Tuesday. With the government’s debt pile set to swell to about A$500 billion ($373 billion) in the current fiscal year and the yield curve already beyond 20 years, “the time is right” to proceed with an extension, he said.

He declined to provide details on potential pricing and volume for the bank-managed transaction.

The development of a longer curve “has lots of knock-on beneficial effects going forward,” said Gavin Goodhand, a money manager at Altius Asset Management in Sydney. “This will hopefully promote more depth over time. In a way it follows trends globally, there’s longer curves in all markets. It pushes Australia in that same direction, which is a good thing.”

‘Meaningful Volume’

With the number of top-rated sovereign borrowers dwindling, investors have lapped up Australian issuance even as ongoing budget deficits caused borrowings to balloon. The AOFM has tapped demand by offering longer maturities in recent years, reducing the government’s refinancing risks and taking advantage of borrowing costs near record lows.

“We are expecting to be able to issue a meaningful volume to meet anticipated broad interest and to establish a maturity of clear benchmark size,” Nicholl said.

The new bond would fulfill part of the total funds the AOFM projects it will need to raise through 2016-17, which it currently estimates at A$93 billion. That’s a far cry from the situation more than a decade ago when a series of budget surpluses saw the government’s funding need evaporate and the bond market shrank to about A$50 billion. The global financial crisis in 2008 prompted a reversal in Australia’s fiscal situation and since then the growth of the nation’s debt pile has led the AOFM to build out the country’s yield curve.

‘Useful Development’

The move to extend maturities began in earnest in 2011 when the AOFM sold a 15-year security. Since then it’s pushed it out by stages to about 23 years through a series of syndicated transactions, with three separate offerings reaching volumes of A$7 billion apiece.

The emergence of Australian bonds with tenors beyond two decades provides an underpinning for the recently-established 20-year bond futures contract that Nicholl said is a “useful development.” The funding organization is committed to supporting that part of the curve and is aiming to establish a new 2041 bond in about a year’s time, Nicholl said.

The AOFM is also looking to manage its funding risk through so-called maturity conversions that will enable it to switch shorter-dated debt for longer securities. Buyback tenders are scheduled to begin next week.

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