Oct. 24 (Bloomberg) -- Demand at a record sale of Australian sovereign bonds and the biggest corporate offering since July shows the nation’s debt market is rebounding from its slowest start to a month in more than a year.
Investor bids exceeded A$3.5 billion ($3.6 billion) for the A$3.25 billion of 2027 bonds sold by the government on Oct. 20, said Citigroup Inc., which helped manage the offering. Australia & New Zealand Banking Group Ltd.’s A$1 billion sale the same day was the biggest by a borrower without state backing since July, according to data compiled by Bloomberg.
Confidence is rising among investors around the world that record exports will help Australia’s economy withstand fiscal crises in Europe and the U.S. Bonds of all types in Australia have returned 9.1 percent this year on average, more than twice the 4.3 percent gain for the global fixed-income market, Bank of America Merrill Lynch indexes show.
“It’s a good sign that there’s reasonable appetite out there,” said David Carruthers, a senior money manager in Sydney at AMP Capital Investors Ltd., which has about A$30 billion of fixed-income assets under management. The ANZ Bank deal “shows that the market remains open for banks,” he said.
Debt sales conducted through banks slowed to A$2.6 billion in September, the least since May 2010, Bloomberg data show. Prior to the government and ANZ offerings, issuance in October was at A$1.3 billion.
Yield Curve Extension
The government’s sale of notes due in 2027 was the biggest this year after the state of Queensland’s A$4 billion offering of 2018 securities in February, Bloomberg data show.
Eighty percent of last week’s issue was scooped up by domestic investors, said James Arnold, the Sydney-based director of capital markets origination at Citigroup. Banks and fund managers accounted for more than 65 percent of the orders, while central banks and government agencies also participated, he said.
“The government bond sale was very well received and suggests that domestic fixed-income investors were looking for” longer-maturity securities, Arnold said. “It gives asset managers the opportunity to lengthen their investment horizon and now that you have a government bond out to 2027, it gives some reference points for other borrowers who might be looking to do longer-dated issues.”
The bond has the longest maturity for an Australian government security since a December 1984 sale of notes that matured Dec. 15, 2000, data from the Australian Office of Financial Management show. The offering was more than twice as large as the previous record of A$1.25 billion.
The 2027 security is the only Australian government debt obligation to yield more than the Reserve Bank of Australia’s 4.75 percent benchmark rate, the developed world’s highest. The note’s yield declined to 4.86 percent at 2:33 p.m. in Sydney today, after pricing at 4.88 percent, Bloomberg data show. All bonds out to the one maturing in 2023, which yielded 4.65 percent today, have had rates less than the benchmark since Aug. 9.
Australian government debt has lost 0.6 percent this month, paring the 9.6 percent gain that made the securities the best performers among 26 markets tracked by Bloomberg/EFFAS indexes in the 12 months ended Sept. 30.
Benchmark 10-year bond yields rose for a fourth straight week amid signs the nation’s economy is expanding, driven by a resources boom and record terms of trade, or export prices relative to import prices. The 10-year rate climbed six basis points to 4.49 percent and has jumped 48 basis points since Sept. 23, the biggest four-week advance since June 2009. It was little changed as of 2:34 p.m. in Sydney today.
The value of Australian exports surged a more-than-forecast 4 percent in the third quarter, a government report showed last week, while import prices remained unchanged. Sales abroad totaled A$28.4 billion in August on coal shipments, and the A$3.1 billion trade surplus was the second-widest on record, the Bureau of Statistics said Oct. 4.
“The very large nominal income inflows into the Australian economy that this implies is a key factor underlying the RBA’s preference to leave rates unchanged,” said Roland Randall, an economist at TD Securities Inc. in Singapore. “The other is the business mining investment boom which also shows no sign of interruption due to global growth concerns.”
Central bank Governor Glenn Stevens is likely to keep rates unchanged for a 12th month on Nov. 1, according to 19 of 25 economists surveyed by Bloomberg News. Six predict a cut to 4.5 percent.
Futures traders are wagering the RBA’s key rate will be at 4.33 percent by December, up from expectations of 4.11 percent on Sept. 30. A Credit Suisse Group AG index based on swaps show bets the central bank will lower its benchmark by 1.07 percentage points over 12 months from 1.33 at the end of last month.
The Australian dollar, the world’s fifth-most traded currency, traded at $1.0380 today and rose as high as $1.1081 on July 27, the most since it was freely floated in 1983.
ANZ Bank sold A$1 billion of four-year floating-rate bonds priced to yield 135 basis points more than the three-month bank bill swap rate on Oct. 20, according to a statement.
The notes’ “distribution was predominantly to Australian investors with good Asian support,” said Apoorva Tandon, a director of syndicate for ANZ Bank, which managed the sale itself. Asset managers, insurance companies, banks and government authorities purchased the bonds, he said.
The spread between the interest Australian banks pay when borrowing from each other for three months and swaps tracking expectations for the RBA’s benchmark rose 3 basis points today to 27. The gap, which is a gauge of banks’ difficulty in accessing funds, closed at 61 basis points on Aug. 8, the widest since January 2009.
Germany’s Kreditanstalt fuer Wiederaufbau issued A$250 million of May 2021 notes on Oct. 19 in the first sale of kangaroo bonds, or debt sold in Australia by foreign borrowers, since Sept. 2, Bloomberg data show.
The perceived risk of holding Australian corporate bonds dropped last week. The Markit iTraxx Australia index fell 6.5 basis points to 182.5, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The extra yield investors demand to hold Australian corporate bonds instead of government debt was at 249 basis points on Oct. 21, after reaching 251 the previous day, matching the most since August 2009, Bank of America Merrill Lynch data show.
Corporate bonds are on course to lose 0.6 percent this month, a smaller loss than the 0.9 percent on Australian sovereign securities, the data show.
--Editors: Garfield Reynolds, Edward Johnson
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