The Australian government sold A$11 billion (US$8.5 billion) of 11-year debt notes in its biggest-ever bond transaction, as investors hungry for higher yields set aside concerns stubborn budget deficits will cost the nation its “AAA” credit rating.
It is the third time in less than six months Australia has set a new borrowing record. It exceeds the A$9.3 billion issued at a sale of December 2021 notes last month and the A$7.6 billion from a debut 30-year deal in October last year. The November 2028 securities were priced to yield 3.005 percent, the Australian Office of Financial Management said yesterday.
The government has been increasing issuance as it struggles to rein in its budget deficit and seeks to finance a debt pile that is expected to top A$600 billion in 2020. Investors have been clamoring for Australian debt even as tighter US monetary policy drives a slump in global bond markets.
The size of yesterday’s sale shows that concerns about Australia’s capacity to keep its top credit score are being set aside as the nation’s relative prudence and weaker economic outlook makes the debt look attractive relative to US Treasuries, according to Robert Mead, managing director at Pacific Investment Management Co in Sydney.
“You’re looking at a bond that’s gone from nothing to a benchmark in one day,” Mead said.
He said before the announcement there was more than A$20 billion demand for the offering.
While ratings companies refrained from taking action following the mid-year budget update in December last year, S&P Global Ratings has had a negative outlook on the nation since July last year.
Australian Treasurer Scott Morrison is scheduled to hand down his next fiscal plan in May.
The new bond will eventually roll into the basket of securities underpinning the ASX 10-year futures contract that is, along with similar three-year and 20-year products, a major fixed-income derivative in Australia.
The basket currently includes notes with maturities ranging from April 2026 to May 2028.
The benchmark 10-year rate has held within a range of 2.63 percent to 2.83 percent this year, following the global bond market sell-off late last year that was spurred by US President Donald Trump’s election and the prospect of US Federal Reserve policy tightening. It was at 2.83 percent as of 3:18pm in Sydney.
The face value of federal government securities is expected to reach A$498 billion by the end of June and rise to A$604 billion in the 2019 to 2020 financial year. The government’s net debt is predicted to peak at 19 percent of economic output next year to 2019 after climbing to 18.1 percent in the current fiscal year, according to official projections.
The 2028 bond has a coupon of 2.75 percent and the transaction was managed by Australia & New Zealand Banking Group Ltd, Commonwealth Bank of Australia, Deutsche Bank AG and Westpac Banking Corp.
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