Australian COVID Recovery Affirmation with $38b Bond Bid
(14 May 2020 - Australia) The Australian post-COVID economic recovery has been given a robust vote of confidence by global fixed income investors scrambling to purchase newly issued sovereign bonds and corporate bond market ‘restart’.
In a promising sign the economy is on track, record interest was recorded for the latest government bond issuance to fund pandemic fiscal stimulus measures totalling A$214 billion requiring an estimated A$300 billion of additional government issuance by the end of H1 20201.
The Australian Office of Financial Management (AOFM) received A$38 billion of bids for the new 10.5 year bond for a final size of A$13 billion. It remains to be seen if the AOFM will raise over A$13 billion from this week's issue when the final offer size is decided. The raising was the largest single Australian bond raising, easily surpassing the previous record order size of A$25 billion for the last month’s bond issuance for November 2024.
The Reserve Bank of Australia (RBA) provided further support to credit markets by announcing it would accept corporate bonds as security for short term loans. Corporate bond issuance has also been given a shot of optimism following successful raisings by Woolworths and La Trobe. Woolworths announced it upcoming issuance of five and ten year bonds, signifying the first corporate bond sale in the Australian market for four months after activity stalled in March as fixed income funds failed to move even high rated securities as withdrawals mounted. After allocating A$860 million of available funds so far, the AOFM supported La Trobe’s raising indirectly by purchasing A$23 million of previously issued La Trobe bonds in the secondary market.
East & Partners latest Research Note also highlights forecast debt capital markets activity was promising for H2 2020 ‘despite everything’.
“There is an argument for rising expectations that a flood of bonds will force interest rates higher. It is the most consensus view we have witnessed in our career" said Westpac Interest Rate Strategist Damien McColough.
"It is only fears around supply that are bearish for bonds. There is nothing in the forward growth or inflation profiles, nor our monetary policy expectations that suggests that yields need to be significantly higher. Australia's bond market offers attractive reward-for-risk and is supported by the AAA credit rating, the low debt-to-GDP starting point and the pre-eminent governance and policy delivery. In our view, it is only fears around supply that are bearish for bonds” Mr McColough added
"Australian government bonds are seeing huge demand as they are currently the cheapest high-quality bonds globally on an outright basis. Australian government bonds are also highly appealing for offshore investors when currency hedging costs are included, which is likely drawing large demand from particularly Japanese and European investors" said Jamieson Coote Bonds Fund Manager Charlie Jamieson. “The size of the order book is testament to Australia's high credit quality and the liquidity of these securities, which many institutional investors have been forced to rethink after the illiquidity in many assets through the March sell-off" he added.
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