Australia Sells A$9.3 Billion of Bonds in Biggest-Ever Sale

(Bloomberg) -- Australia’s government sold A$9.3 billion ($7 billion) of notes maturing in December 2021, its biggest-ever bond transaction.

The offering was snapped up by investors even as doubts swirl about the country’s top credit rating and the government’s ability to rein in its budget deficit. While credit assessors refrained from taking any action following December’s mid-year budget update, S&P Global Ratings has had a negative outlook on the country since July.

The new securities were priced to yield 2.24 percent, the Australian Office of Financial Management said Wednesday. Their sale eclipses the A$7.6 billion raised by the AOFM’s debut 30-year deal in October. The funding arm is also buying back A$655 million of July 2017 bonds and A$2.41 billion of January 2018 debt in conjunction with the deal.

“Early indications were that it was going to be a popular bond and it came a touch cheap, so investors were happy to participate,” said Michael Turner, a fixed-income strategist at Royal Bank of Canada in Sydney. “This is going to be a very liquid part of the curve. You offer investors maybe just a touch of value and it should go reasonably well and it looks like it did.”

Selloff Halted

The sale follows a recovery in buyer appetite for debt that’s brought three-year bond yields down after the selloff in global debt markets took them as high as 2.07 percent in December. The rate slid 1 basis point Wednesday to 1.97 percent as of 4:22 p.m. in Sydney.

The 2021 transaction is a “pretty good deal” both for buyers and the issuer, said Martin Whetton, a Sydney-based interest-rate strategist at Australia & New Zealand Banking Group Ltd., one of the banks managing the sale. “That part of the curve in other markets has settled down, the selloff has stopped.”

The new bond will eventually roll into the basket of securities underpinning the ASX three-year futures contract that is, along with similar 10-year and 20-year products, a major fixed-income derivative Down Under. Volume on the three-year contract topped 200,000 on Wednesday for the first time in more than a month and was about double the average daily volume of the previous five days.

The face value of federal government securities is expected to reach A$498 billion by the end of June and exceed A$600 million in the 2019-20 financial year. The government’s net debt is predicted to increase to peak at 19 percent of economic output in 2018-19 after climbing to 18.1 percent in the current fiscal year, according to official projections.

The 2021 bond has a coupon of 2 percent and the transaction was managed by ANZ, Citigroup Inc., UBS Group AG and Westpac Banking Corp.

--With assistance from Masaki Kondo and Mark Cranfield To contact the reporter on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net. To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Chris Bourke, Peter Vercoe