Australia May Rethink Treasury Note Maturity Extension After Mar 2021 Disappoints

By Sophia Rodrigues

Australia’s experience with extending maturity profile of Treasury Notes to meet the government’s elevated borrowing and liquidity needs is meeting with limited success, and could prompt the debt manager to revisit the plan.

The Australian Office of Financial Management might reduce Note issuance beyond nine months and even give up the plan to introduce new issuance up to 12 months.

At the weekly Treasury Notes tender on Thursday, the AOFM received coverage of just 1.965 times for the auction of March 2021 Note. The Note was issued at a weighted average yield of 0.2972 which was higher than the yield for 3-year government bond, and about 10bps higher than the yield for August Note auctioned at the same time.

For context the 1.9 times coverage was the lowest for any Note tender this year, and may be an indication of dwindling interest for the paper. This led to lowest bid at 0.25% and the highest as high as 0.33%.

In April, the AOFM said it will continue issuance of Treasury Notes at an elevated rate and extend the maturity profile to 12 months. Since then it has extended the profile and issued November and December 2020 maturities, and February and March 2021.

Each of the February and March 2021 tenders have resulted in weighted average issue yield of over 0.25%. The March 2021 Note in particular saw higher yield even when the coverage ratio was stronger at 4.8 and 5.6 times at the first two tenders. The recent one on Thursday was however the worst.

Extending the maturity profile to 12 months means the AOFM could issue Note with maturity up to 364 days but recent experience suggests they may not use that flexibility until they are confident of attracted strong demand at decent yield.