The lucky country


You may have read that the AOFM (Australian Office of Financial Management) just pulled off the biggest bond issue in Australian corporate history. They just sold $19bn of November 2024 Government Bonds. The initial issue size was $13bn and they saw $53.5bn worth of bids at a coupon of 1.02%. There was "strong interest" from Europe, Asia, North America and the United Kingdom – in fact 19 countries took part. When the World is faced with negative interest rates, 1.02% is sexy.

The AOFM said 'the steepness of the bond curve' – which means rates on long-term bonds are higher than short-term bonds – 'made the recent offer attractive to offshore investors'.

Unless I'm very much mistaken the AOFM, the Government, and Morrison, were both surprised and delighted by the interest in Australian debt and the realisation that we are not going to have any trouble financing a $130bn Budget deficit this year and $200bn next year (10% of GDP - the highest since the Second World War prompting talk of a temporary deficit tax).

The success of the issue looks like an international vote of confidence in the Australian economy and the perceived lack of Sovereign risk dealing with Australia. That in a wounded world, Australia is going to come out of COVID-19 better than most (better than almost anyone), and that we are going to do what Morrison hopes - "bounce back and bounce back strongly" and "grow our way out" of the economic air pocket we've gone into and on that basis.

Or, 1.02% in a negative interest rate World heading into recession, the AOFM has completely mispriced these issues – of course they are being hit with billions. In some of those 19 countries, they have to pay to give their money to the Government.

Cynicism aside - here are a couple of charts which make the point that Australia is a good risk relative to a long of Governments that could be offering bonds. The first is the IMF's forecast of Global GDP. It collapses then recovers.

Whilst Australia moseys along:

So excited was the AOFM by the demand that they are now pricing another $19bn issue of December 2030 bonds. This time they might lower the coupon. They under-priced the last one.

Footnote - Before you throw your hands up in horror at a $130bn budget deficit, you should know that we have one of the lowest debt to GDP ratios of all developed nations. Our debt to GDP ratio is going to go from 23% to 40-45% thanks to COVID-19. The US is at 107%, the UK at 80.4%, Japan, Greece, Italy, Portugal are all over 110% with France 98%, Spain 95%, Canada 90% and the EU 79%. On a relative basis, we're looking good.

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