There is not a lot going right at the moment for the Federal Government which was forced into blowing out what looked like being a balanced budget.
The culprit, of course, was the battle against the COVID-19 pandemic with an unprecedented $214 billion spending package quickly rolled out to support the economy during the battle.
That is a massive budget turnaround and one that will leave annual deficits for many years to come, along with adding a sizeable amount of extra foreign debt that will take a lot of shifting – potentially over decades.
Australia still highly creditworthy
If there is a tiny consolation prize for this fast-deteriorating budget position, it is that the success of Australia’s fight against coronavirus is being recognised and our high creditworthiness is shown by a continuing triple A rating, producing a really solid appetite for our government bonds among foreign buyers.
In simple terms, if you do have to raise a lot of money in a hurry, there is nothing better than seeing a queue form to lend you the cash and that is exactly the situation Australia has been in this year.
Just this week the Australian Government cracked a new record by selling $19 billion of bonds maturing in 2030, amid strong demand from investors.
All told, the government’s debt agency which runs bond sales, the Australian Office of Financial Management (AOFM), said the syndicated offer drew $53.5 billion in bids.
That $53.5 billion of orders exceeds the $25 billion of bids attracted for last month’s November 2024 bond issue, which at a final size of $13 billion, was then the largest single Australian bond raising.
Cash also being raised on the share market
It has been a similar situation on the share market with credit worthy companies that have hit problems being able to raise significant amounts of money, with hearing implant maker Cochlear’s $880 million raising an early example.
Obviously, less credit worthy companies will need to offer bigger discounts to raise their capital, and only then, if they are accompanied by a good “story’’ about how the extra cash will be employed.
There are no such problems for the Federal Government at the moment, or, for that matter, the states which are also spending up big and will no doubt be tapping debt markets as well.
Longer term yields trending up
The latest bond raising that set a new record was for 1% Treasury bonds maturing on 21 December 2030 with a yield to maturity of 1.025%.
While that 1.025% yield looks mighty skinny for those of us raised on much higher interest rates, by international standards it is a high yield for a highly secure government bond.
Even after allowing for currency hedging, that interest rate looks very attractive, particularly for investors in Europe and Japan who are now accustomed to buying government bonds with negative yields.
One thing that the bond auction has shown is that while the Reserve Bank is successfully keeping short term rates very low to cut borrowing costs for Australian home buyers and businesses, longer term bond yields have been creeping upwards.
That is simply a measure of supply and demand with the more bonds available, the lower the scarcity value and the higher the yield that is required to ensure that the bonds are sold.
The higher yields are more a measure of this supply and demand effect than they are of any fears that Australia’s forward growth rates or inflation outlook would warrant a higher yield.
Bank deposit rates heading down
Still, the higher long-term bond yields are interesting for bank customers who are seeing retail interest rates on their savings and term deposits fall as the Reserve Bank’s extraordinary activities to buy short-term bonds to keep borrowing rates lower takes effect.
Comparison website Canstar has reported that there were 167 changes to term deposits recently, of which 164 were cuts.
Corporate bond markets show renewed life
Adding to the optimism in fixed income this week was a reopening of the corporate bond market by Woolworths and a successful $1.25 billion mortgage-backed bond raising by non-bank lender La Trobe.
The corporate bond market had seized up in March as fixed income funds struggled to offload even the highest rated securities amid a wave of withdrawals.
Last week the Reserve Bank boosted credit markets by announcing it would be prepared to accept corporate bonds as security for short term loans and was also understood to be supporting the corporate bond market through purchases.
The AOFM is now expected to raise $250 billion to $300 billion before 30 June 2020, as the government seeks to finance the COVID-19 economic support package.