Spreads Drop by Record, Spur State Bond Sales: Australia Credit
February 19, 2012, 3:55 PM ESTBy Candice Zachariahs
Feb. 20 (Bloomberg) -- Australian state governments are increasing bond sales as yields on their debt drop by the most relative to federal securities in at least 15 years.
Queensland, the biggest provincial debtor, borrowed A$3.2 billion ($3.4 billion) this month, its funding arm said. Victoria raised a net A$1.1 billion, the biggest monthly sale since August. The extra yield investors demand to hold regional notes instead of federal debt slid 33 basis points this month to 89 on Feb. 16, the largest drop in data going back to December 1996, Bank of America Merrill Lynch indexes show.
Borrowing costs for Australian states fell as investors were lured to the highest relative yields on regional debt since March 2009 amid optimism Greece will get a second aid package. International investors seeking to hold the safest sovereigns drove 10-year Australian government yields to a record low on Feb. 1. The nation is among 12 that hold the top grade from all three major ratings firms. The spread for U.S. municipal borrowers has shrunk three basis points in February to 61, while the gap is unchanged at 68 for Canadian provinces.
“The offshore appetite for Aussie dollars is filtering through into semi-government debt now that risk appetite is re- emerging and the states are benefiting very much from that,” said Adam Donaldson, head of debt research at Commonwealth Bank of Australia, in Melbourne. “Queensland has had a pretty good start to the year with much of its issuance coming in February.”
Outpacing Corporates
State governments raised at least A$5 billion this month, exceeding the A$4 billion of corporate borrowings, according to data compiled by Bloomberg. The extra yield investors demand on state debt reached 123 basis points on Feb. 1, the most since 2009, amid concern European leaders wouldn’t be able to resolve Greece’s debt problems.
Queensland has now met 87 percent of its 2011-2012 financing program after borrowing A$16.7 billion since July 1, 2011, Queensland Treasury Corp. said Feb. 16 in an e-mailed response to questions. QTC’s February sales contributed to A$4.2 billion in term-debt issuance this year, after borrowings dropped by almost 75 percent to A$1.4 billion in the three months ended Dec. 31, from the previous quarter.
The extra yield Queensland’s 6.25 percent note maturing in February 2020 offers over similar-maturity Australian government bonds narrowed to 120.6 basis points after touching 163.2 basis points on Jan. 31, the most since it was issued in February 2010, according to Bloomberg Bond Trader prices.
‘Cheap’ Bonds
The gap for New South Wales’s May 2020 security was 81.5 basis points from 104.8 on Feb. 1, the widest since April 2010. The spread for Victoria’s June 2020 bond declined to 84.1 basis points from as much as 106.2 basis points on Feb. 1, the most since it was sold in 2009.
“These semi-governments were cheap,” said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “Demand has returned from both domestic and foreign investors at the same time as it seems that the ask in terms of issuance is a lot lower than people thought, particularly in the case of Queensland, and that’s helped the spreads correct.”
Queensland probably needs to raise about A$1.3 billion more in long-term funding this financial year, while New South Wales requires A$4.7 billion, Jolly estimated last week. Victoria needs to raise a further A$2.1 billion, Western Australia A$4.7 billion and South Australia A$1.1 billion, he projects.
Queensland has A$74 billion in outstanding debt, followed by A$47.8 billion for New South Wales and A$28.7 billion for Victoria, Bloomberg data show. Western Australia has A$20.1 billion in securities on issue and South Australia has A$9.9 billion, according to the data.
Beating Sovereigns
Bonds sold by Australia’s six states, the Northern Territory and Australian Capital Territory returned 0.5 percent this month, including reinvested interest, the Merrill Lynch indexes show. That’s the biggest advantage over sovereign debt since May 2009.
Australia’s benchmark 10-year government bond yield rose 12 basis points, or 0.12 percentage point, to 4.05 percent on Feb. 17. It dropped to an all-time low of 3.648 percent on Feb. 1. The premium over similar-maturity Treasuries was 205 basis points last week from 2011’s low of 171 on Dec. 26.
Elsewhere in credit markets, spreads on Australian dollar corporate notes over government bonds were at 267 basis points on Feb. 16 after reaching 295 basis points on Dec. 29, the most since 2009, according to Merrill Lynch data.
The Australian dollar, the world’s fifth most-traded currency, fetched $1.0775 as of 5 p.m. on Feb. 17 in Sydney, poised for a 1 percent weekly advance. It rose as high as $1.0845 on Feb. 8, the most since Aug. 2, after touching $1.1081 on July 27, the strongest since the currency was freely floated in 1983.
‘Good Support’
Australian states pulled back from bond markets in the final quarter of 2011 as concern Europe’s sovereign-debt crisis would slow global growth drove up the provinces’ borrowing costs relative to federal government debt.
Victoria raised net debt of A$1.6 billion this year, compared with A$520 million in the final three months of 2011 and A$1.7 billion in the July-to-September period, Treasury Corp. of Victoria said.
“In January, we saw good support from the domestic banking sector so we were able to get a fair bit of issuance away and that’s continued into February,” said Justin Lofting, general manager of treasury at Treasury Corp. of Victoria. “We’re starting to see more demand not just from the domestic banks but also fund managers and international investors.”
--Editors: Garfield Reynolds, Edward Johnson
To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
