This Time Australia Gets Paid More, And For Each 4-Month Note At A$500M Tender

By Sophia Rodrigues

(Sydney, June 17, 2021)—A second straight week of record for Australia’s government borrowing and this time it is getting paid for every Note sold at the entire tender of A$500 million of Treasury Notes for a period of four months.

Moreover, the amount it is making from the sale is higher than before.

At the weekly tender of T-Notes, the Australian Office of Financial Management sold A$500 million of October 22 Notes at a weighted average price of -0.0112%. The lowest (-0.015%) and the highest (-0.0050%) accepted yield were both in the negative, meaning the AOFM got paid for the entire sale.

At the tender of September 23 Notes, the weighted average price was -0.0053%, with the lowest at -0.015% and the highest at zero.

The lowest weighted average previously achieved by the AOFM was -0.0034% at last week’s tender of the September Notes.

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.

The reason these traders must bid aggressively at negative rates is that there are small institutions who bid at the tenders at zero rate because they don’t have access to the Reserve Bank of Australia’s Exchange Settlement balances which pay zero.

It appears these institutions got knocked back at the October 22 tender where the highest accepted yield was also negative.

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$285 billion as of June 15, compared with around A$110 billion at the start of the year.