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Australia's record A$7.6 billion bond attracts historic offshore demand
October 13, 2016 / 7:41 AM / 10 months ago

Australia's record A$7.6 billion bond attracts historic offshore demand

One dollar and 10 cents in Australian currency sit atop a U.S. one dollar note in this photo illustration taken in Sydney July 27, 2011.Tim Wimborne/Files

SYDNEY (Reuters) - Australia's new 30-year bond sale broke a slew of records this week, being the largest in size at A$7.6 billion, attracting the most buyers ever, and boasting the largest-ever order book.

With no less than 90 investors on board, it underlined the attractiveness of Australia's higher yielding, top-rated debt in a world of zero interest rates.

"We would have been happy with A$4 billion, so A$7.6 billion is a really good outcome and a surprise," Robert Nicholl, chief executive of the Australian Office of Financial Management (AOFM) said in a telephone interview on Thursday.

Th AOFM is the funding agency of the federal government.

The issue follows super long-dated offers this month by Italy and South Korea as governments around the world take advantage of historically low interest rates to borrow cheaply.

A whopping 65 percent of the paper went offshore, according to the AOFM, more than double a 12-year issue sold in May.

Around 60 percent of Australia's outstanding government debt of A$443 billion ($336 billion) is held by international investors.

The 30.5-year bond pays a yield of 3.27 percent, or 101 basis points over the yield implied by 10-year bond futures.

"It's the only government bond in the (developed) world with a yield over 3 percent," Steve Goldman, a global portfolio manager at Kapstream Capital which manages A$11 billion of fixed income assets. "It's hard not to like."

Goldman said his next choice in yield in developed-world government bonds was a 50-year triple-B rated Spanish bond.

Australia is one of only a dozen countries rated triple-A by S&P and Moody's.

"So I pick up half a percent to buy a shorter maturity with a triple-A rating," Goldman said.

With A$13.8 billion of orders at the cleared margin of 101 basis points, it was largest order book for an Australian government offer and resulted in substantial scaling back, the AOFM said.

AOFM's Nicholl said fund managers received the largest allocation at 69 percent of the issue, while hedge funds, including some new to Australia, bought 10 percent.

Bank trading books grabbed 13 percent, bank balance sheets under 3 percent and central banks nearly 2 percent.

By geography, the UK snapped up 23 percent of the issue with buyers including pension funds. North America bought 20 percent, Europe 10 percent, Japan 6 percent and Asia 5 percent.

Nicholl said the biggest surprise was from Japan which typically buys Australian bonds in the secondary market rather than at official sales.

"It reflects appetite for duration," said Nicholl.

ANZ Bank, Citi, Commonwealth Bank of Australia, Deutsche Bank, UBS and Westpac jointly managed the sale.

($1 = 1.3187 Australian dollars)

Reporting by Cecile Lefort; Additional reporting by John Weavers; Editing by Eric Meijer

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