Analysis: Record Australia Govt Bond Issue Despite Hedge Funds Getting Sidelined

By Sophia Rodrigues

The Australian government created a record for a single bond issue, selling A$13 billion of the new 0.25% 2024 bond even after rejecting nearly 50% of the bids at the issue price.

The rejected bids were likely from hedge funds and trading accounts, and the Australian Office of Financial Management appears to have refused them allocation to prevent any renewed risk of strained market conditions.

AOFM will publish details of the allocation on Thursday. The joint-lead managers for the issue were ANZ, Deutsche Bank, UBS AG, Australia Branch and Westpac Institutional Bank.

The bond was priced Wednesday at 0.47% which is 19bps over the implied bid yield for the primary three-year Treasury Bond futures contract. This was at the higher end of the 16bps to 20bps initial price guidance.

At the final clearing price, the issue attracted bids totalling A$25.8 billion but the AOFM accepted only A$13 billion. The total order book was higher than that, possibly closer to A$28-A$30 billion.

The issue was done via syndication where the AOFM has an insight into direct investor participation, and has discretion over pricing, volume and allocations.

One of the main reasons to do the syndication is to ensure the bonds go directly to investors which helps overcome congestion risk when market conditions are strained. This is very important in the current environment where there is heightened risk of renewed dislocation in the secondary market on any negative news around the coronavirus.

The fee on the syndication was A$0.09 per A$100 face value, so the AOFM has spent A$11.7 million on the issue.

The issue size of A$13 billion has beaten previous record of A$11 billion for a new bond issue done in February 2017 for a 2.75% November 2028 bond. The bond tenor of 4y7m is also the shortest bond done via syndication, beating the previous record of 4y11m.