Investors rush to 31-year Aussie bond paying ‘attractive’ 5pc yield

“If someone had told me two years ago you would be able to buy government bonds at 5 per cent, you would have been laughed at, and I probably would have joined,” said Pendal head of government bond strategies Tim Hext, who participated in the offer.

“I think this will start to make people pay attention to the fact that you can lock in some pretty attractive rates.”

He estimated a small issue premium of a couple of basis points. “Overall, it was fairly priced,” he said.

Smaller deals

Australia boasts a triple-A rating from all three major credit agencies thanks, in part, to low debt levels relative to other advanced economies. It has $900 billion of bonds in circulation.

Last week, a US Treasury sale of 30-year bonds had to be sweetened by 3.7 basis points as investors demanded a better premium.

AOFM chief executive Anna Hughes said the plan was to keep the offer under $10 billion because the 2023-24 funding task was not “particularly big”.

“That’s why we were very much looking at smaller deals than what we’ve been doing in the last couple of years,” she said.

Earlier this year, the government reduced its annual borrowing needs to $75 billion following a better-than-forecast budget surplus. A budget update will be released in the Mid-Year Economic and Fiscal Outlook before Christmas.

Fund managers, or real money investors, snared two-thirds of the new issue, and trading accounts and hedge funds took the remainder.

Just over half of the issue was sold to Australian buyers, while Asia-based investors snapped up 16 per cent. There was strong interest from the UK, which spoke for 16 per cent, and the remainder was split between continental Europe and North America.

The debt issue came amid wild swings in financial markets on interest rate expectations and developments in the Middle East after the attack on Israel by militant group Hamas.

“We need to issue across the cycle, and we are a price taker, rather than trying to predict where bond yields are going,” Ms Hughes said.

She stressed that a 2054 bond had been programmed earlier this year for the December quarter and a period devoid of key economic data releases had been chosen to auction it.

“Investors appreciate the fact that we do what we say we’re going to do,” Ms Hughes said.

It was the first major role for Barrenjoey in a syndicated government bond issue. Ms Hughes said the broker had been an active market maker in the AOFM’s bond auctions, specialising in the ultra-long end of the curve. The agency has 19 market makers.

CBA, JPMorgan, UBS and Westpac also jointly managed the offer.