Australia’s bond yield curve is unlikely to extend beyond 30 years for the “foreseeable future”.
The head of the Australian Office of Financial Management (AOFM), Australia’s government funding agency, Rob Nicholl says he sees little benefit in an extension, despite inquiries from investors.
Australia debuted its 30 year bond last year selling $7.6 billion worth of securities. The March 2047 bonds were priced to yield 3.27%, the most among developed market peers.
“For the longest end of the yield curve we are definitely counting on sustained demand sufficient for us to establish a new 30‑year benchmark next year or the year after,” Nicholl said in a speech on Tuesday. “That said, we see little scope for or benefit from extending the yield curve further.”
There is no indication that there would be any sustained investor appetite for such a long duration in Australian government securities, he said. And a very small illiquid 50-year maturity wouldn’t add noticeably to extending the duration of the portfolio.
A number of countries have issued out to 50 and even 70 years and from my understanding these have been either one-off or yield related opportunistic deals. In addition, these have (mostly) been Euro denominated issues and therefore offer a currency advantage given the size and breadth of that market. Furthermore, there has been no indication to us that there would be any sustained investor appetite for such long duration in AGS.
For now, the AOFM will look to building the 2047 part of the curve by issuing another 30 year bond as demand emerges.
Nicholl also said he doesn’t expect a drop in demand from any global instability. Given the funding task is markedly lower global volatility should only boost support for Australian bonds.
AOFM estimates net issuance in the year to June 2018 will be $34 billion, compared with $74 billion a year earlier.
He also pointed to looming risks from the contraction in spreads between Australian bonds and their US peers. The yield premium that Australian bonds offer over Treasuries stands at around 16 basis points, the lowest since 2001 as the US Federal Reserve is seen lifting rates while the Reserve Bank of Australia is expected to stay on hold.
The AOFM doesn’t expect too much investor angst.
I can assure you we noticed it. But with a planned issuance rate for 2017-18 appreciably lower than it was for the first half of this fiscal year I wouldn’t expect the same degree of angst compared to when our issuance rate was at or above $2 billion per week and the market felt ‘heavy’.
Non-resident holding of Australian government paper last year fell to the lowest level since 2007 as foreign appetite didn’t keep pace with issuance.
There is sufficient diversity in the investor base as this chart points out and the AOFM has enough issuance options to satisfy varied investor demand, Nicholl said.
“The healthy diversity in the investor base is something we see little risk of retreating over the foreseeable future – absent the possibility of an appreciable tightening of spreads to US Treasuries – which would no doubt lead to a period of re-pricing in our market,” he said.