Australia Borrows A$1.0B And Pays Nothing, Even Gets Paid For Most Of It

By Sophia Rodrigues

(Sydney, June 10, 2021)—For the first time ever, Australia has borrowed an entire tender totalling A$1.0 billion at no interest cost, even receiving interest for most of that amount.

At the weekly tender of Treasury-Notes, the Australian Office of Financial Management sold A$1.0 billion of the 24 September 2021 Notes at a weighted average yield of -0.0034%.

While the AOFM has previously sold Notes at a negative yield, this is the first time the weighted average yield of the entire tender is negative. Moreover, this is the first time, the AOFM didn’t pay a cent for any Note in the tender because the highest accepted yield is zero.

The previous low for weighted average yield was at the June 3 tender when it came at 0.0015%. The lowest accepted yield at that tender was 0.0050%.

Negative yield on T-Notes is the result of trading opportunities arising from forex swaps where the return from the swap is so positive that one is prepared to offset on the other side of the trade by paying interest on T-Notes.

If the liquidity in the system was not as ample as it is now, and the rate on Exchange Settlement balances was not zero, T-Notes would have likely not gone negative. So, these are contributing factors to making the T-Notes negative, but the attractiveness in forex swaps remains the key reason.

Such opportunities were present in December 2020-January 2021 but once trades got too crowded, the gap closed.

Negative yield doesn’t reflect outlook on the RBA’s cash rate.

The RBA’s cash rate target is 10bps but the overnight cash rate has been at 3bps since the start of this year. The total amount of ES balance was around A$275 billion as of June 9, compared with around A$110 billion at the start of the year.