Insight: Australia Confident of Demand for Govt Bonds as Foreign Demand Rises
- Published on
- 28 Apr 2020, 01:58 PM
By Sophia Rodrigues
The Australian government’s market borrowing is expected to continue at an elevated pace this year but strong demand from foreign investors, including Japanese investors, is expected to ensure bond tenders will be cleared.
Such demand could also mean there would be more bond issuances at the long end of the curve because of confidence that Japanese investors would support such bonds, particularly the very long ones.
It also means that Australia doesn’t have to worry about directly monetizing its debt with the Reserve Bank of Australia.
SHARP INCREASE IN ISSUANCES
The Australian Office of Financial Management stepped up bond issuances this month, raising a total A$26.6 billion (face value), sharply up from A$4.0 billion in April last year, and more than three times the previous record for the April month of A$7.3 billion in 2016.
The average coverage ratio for these bond issues was around 4 times, indicating strong demand.
The sharp increase in borrowing is a result of a record stimulus package announced by the government to support individuals and businesses affected by the coronavirus. A big part of this package is going towards the Jobkeeper policy where the government is subsidizing wages to affected business, so they can retain staff.
The large bond issuance this month included a syndication issue of the 0.25% November 2024 bond. The syndication was a clever move by the AOFM because it allowed them to raise a big sum in one issue and also gave insight into the sources of demand.
As expected, the syndication generated strong demand and attracted A$25.8 billion at the clearing price, but AOFM accepted A$13.0 billion which was a record for a single issuance.
More importantly, the syndication showed there was a lot of demand from Euro and U.S. investors.
It is expected that the demand from offshore investors has resulted in increase in the proportion of demand from offshore versus onshore, but it is unclear at this time how significant the difference this.
The AOFM will be monitoring this in the months ahead.
NO DIRECT DEBT MONETIZATION EXPECTED
The strong demand for Australian securities means, at least as of now, the RBA doesn’t have to think of the possibility that it would have to monetize the government debt.
Governor Philip Lowe has been very keen in sending that message and in a speech last week he reiterated, “I would like to restate that we are buying bonds in the secondary market and we are not buying bonds directly from the government.”
Among other central banks, Bank Indonesia bought a small amount of government bond at recent tender by bidding as a non-competitive bidder, The Jakarta Post reported.
The Reserve Bank of New Zealand governor Adrian Orr recently said he remains open minded about buying government bonds directly, according to a Bloomberg report.
Lowe’s confidence likely comes from the RBA’s liaison with both the domestic and overseas investors that suggested there’s strong demand for Australian government securities.
“We have very high credit rating. We have one of the lowest stocks of public debt on issue. We’re managing the health crisis much better than many other economies and we will get through this in a strong position,” Lowe said at Q&A last week.
“So, I don’t have any concerns that people won’t want to buy Australian government bonds,” he added.
Contact: sophia@centralbankintel.com