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Australia's 30-Year Bonds Look Set for Strong Investor Demand

  • Rate on Australia’s 20-year note reached 2.87% this week
  • Sale of country’s longest-ever bond to be priced Wednesday

Australia looks set to pay higher borrowing costs than it might have anticipated a few weeks ago when the government announced its first ever 30-year bond. That could be just the thing to tempt investors.

The global selloff in debt pushed Australia’s 20-year yield to a three-month high of 2.87 percent this week and it was at 2.84 percent as of 12:30 p.m. on Wednesday in Sydney. In the U.S., the world’s deepest market, the 30-year benchmark climbed 19 basis points this month to 2.51 percent, spurred on by expectations of Federal Reserve interest-rate increases and speculation other central banks may be near the limits of policy accommodation.

Australia is one of the markets that’s seen central bank easing expectations pared back, with the odds of another quarter-point reduction in the cash rate within the next year dropping to just 31 percent, according to swaps data compiled by Bloomberg. That’s helped drive an expansion of the yield premium that Aussie notes offer over U.S. paper.

“I suggest there will be very good investor demand” for the Australian 30-year note, said Tony Morriss, an interest-rate strategist in Sydney at Bank of America Corp.’s Merrill Lynch unit. The yield on the new security will be “comfortably above 3 percent” and “that’s a very attractive pickup relative to the equivalent U.S. dollar bond,” he said.

Price Guidance

The Australian Office of Financial Management, which is charged with financing the government’s ballooning debt pile, said it will sell notes on Wednesday that will mature in March 2047. They’re likely to yield 100 to 107 basis points more than the 10-year government bond future, placing the overall rate at 3.22 percent to 3.29 percent, based on Tuesday prices. The sale is being managed by a syndicate of six banks.

“Three percent is an attractive level,” said Hideaki Kuriki, a debt investor at Sumitomo Mitsui Trust Asset Management in Tokyo, which oversees about $79 billion. He said that while he would not participate in the the sale because he doesn’t need to extend his portfolio duration any further, Japanese investors and other money managers from outside Australia would be interested in buying the debt.

The following charts illustrate the current situation for Australia’s debt market, where it sits within the international landscape and how the newest bond stacks up locally.

CHART 1: The longest bonds have been the most heavily hit in Australia of late, with securities due in 20 years or more losing 3.2 percent in the month to Oct. 10.

CHART 2: Australia’s 30-year bond is set to carry a higher yield than comparable sovereign notes in other major developed markets. The benchmark rate in the U.S. is 2.51 percent, while for Japan it’s 0.52 percent and Germany’s is 0.65 percent.

CHART 3: The increase in the yield premium offered by the Australian market is underscored by the widening of the spread between Aussie and U.S. 10-year securities, which this week reached an almost three-month high of 50 basis points.

CHART 4: Aussie investors seeking a yield that’s similar to the new 30-year federal note could choose to park their money in a range of different company notes instead, although naturally these carry lower credit ratings than the sovereign. Apple Inc.’s June 2026 note yielded 3.34 percent on Tuesday, while notes from Melbourne Airport due in September 2022 were at 3.32 percent, based on prices from Australia & New Zealand Banking Group Ltd.

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