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AOFM to issue first 30-year bond, defies rating threat
Australian Financial Review Sep 13 2016 at 4:13 PM
Jonathan Shapiro
The Australian government has unveiled plans to issue its first ever 30-year bond as it seeks to take advantage of strong investor demand for high yielding assets even as foreign investors scale back purchases and credit rating agencies threaten downgrades.
Rob Nicholl, the chief executive of the Australian Office of Financial Management told an audience of economists in Sydney that the unit responsible for debt issuance was planning a benchmark sized 30-year bond issue in October.
The 30-year bond is part of the AOFM's long-term strategy to issue longer-term debt to reduce the refinancing risk of the government debt by pushing debt maturities into the future while reducing the impact of changing interest rates on the federal government's funding cost.
The strategy has so far been successful as the government has managed to lengthen the average maturity of its debt book from five years to seven years.
This has reduced funding risks over the next five years by $12 billion a year, he said.
At the same time average funding costs have fallen by 1.60 percentage points as global interest rates around the world have fallen.
"That the government can now borrow at lower cost than it could seven years ago is a consequence of global economic and financial market influences and does not in itself reflect an AOFM objective," said Mr Nichol.
Lower rates, longer maturities
But, he said the falls in global rates had allowed the government to extend its debt maturities at lower than historic cost.
"It comes down to the fact that rates are low globally because of the extraordinary attempts by central monetary authorities to stimulate the economic growth through various channels."
While long-term debt constitutes more secure funding, it is more costly and Mr Nicholl said it was "debatable" how hard the unit should push to achieve this objective.
In his annual update to the market, Mr Nicholl said its annual funding task had been set at around $93 billion achieved by several large "syndicated" bond placements and regular auctions held throughout the year.
To hit its funding target – which is set by the government – the AOFM monitors market conditions, currency derivative levels which influenced offshore demand and the ability of dealers to support new and existing issues.
In the last five years international investors, such as central banks and sovereign wealth funds, emerged as major buyers of Australian government bonds, owning up to 80 per cent of all government debt at one stage.
Offshore buyers back off
But recent data has shown that ownership has fallen to below 60 per cent. So why are foreigners buying less of our bonds?
"It's difficult to determine in detail what lies behind this trend but we do know that reserve manager accumulation of government bonds is a mature rather than maturing story," said Mr Nicholl.
He added that while foreigners have bought more Australian government bonds, it has not kept pace with the rate of issuance of government debt while longer-term debt issuance has attracted more domestic investors.
"The declining significance of offshore investors is not in itself a concern as we look at our current and forecast issuance tasks but it does remind us there are likely to [be] limits to offshore demand for our bonds in Australian dollars and at current yields relative to alternative assets."
Mr Nicholl said the potential impact of a loss of Australia's coveted AAA credit rating was "very little to nothing".
He said when Standard & Poor's revealed in July that it had placed the rating on negative outlook "there was no perceptible price move".
"That's a clear signal. Since that announcement I have been overseas talking to investors and the feedback I have had is consistent with our expectation that most offshore buyers invest for yield and liquidity, not credit rating. So the prospect of the credit rating move is not something that is attracting much attention from investors."