EXCLUSIVE: Australia Debt Agency CEO: Definitely Not Time to Try to Extend Maturity of Our Curve
5 May 2021
- AOFM CEO Nicholl: Ready for Ongoing Large Issuance Tasks, But Worst Probably Behind Us
- No Specific Concerns at This Point About Tensions With China
By David Barwick – FRANKFURT (Econostream) – Australia’s debt issuing agency, the Australian Office of Financial Management, is sceptical of the feasibility of significantly extending the maturity of its curve and in any event would not wish to attempt it under current circumstances, AOFM CEO Robert Nicholl said Tuesday.
In an interview with Econostream, Nicholl said against the backdrop of high government borrowing to offset the impact of the pandemic that the AOFM is ready for sizeable issuance needs or even additional market volatility, but that probably ‘the worst is behind us’.
The AOFM has no particular worries in its capacity as issuer at this point about tensions between Australia and China, he said.
The AOFM has been considering possible further efforts to extend the maturity of its curve ‘on and off now for quite a few years’, Nicholl said, but is ‘pretty confident’ that demand for 50-year AUD-denominated maturities would be far from demand for such instruments in US dollars or euros.
‘There is no portfolio benefit to us in having a small amount at 50 years and there is by no means any indication it would be a liquid part of our market’, he said. ‘It’s a lot of risk for intermediaries to warehouse and this means it would be very challenging to tap such a line by tender after it was established. In any case, now would definitely not be the time to try given how steep our yield curve is.’
Asked how he would handle new government borrowing required by the effort to counteract the pandemic, Nicholl observed that ‘forecasts indicate quite a drop into next year and the out-years, so it looks like the worst is behind us.’
‘That said, we have a lot of operational flexibility in terms of issuance options in the bond market, healthy access to cash markets through our Treasury Note issuance, good liquidity, broad intermediary support and well-honed issuance methods, so I feel we are adequately prepared for ongoing large issuance tasks or the emergence of further market shocks/volatility’, he added.
Australia, which is set to announce the next federal budget on May 11, has a ‘relatively strong balance sheet position even after the impacts of last year’, Nicholl said. ‘The constant feedback we get from investors is that the market is very liquid and they understand the AOFM as an issuer – together I think this is only positive for Australia.’
Rising tensions between Australia and China had not at this point led the AOFM to ‘any specific concerns as an issuer’, he said.
With respect to the Australian Securities Exchange’s 20-year futures contract, Nicholl said there were reasons for the lack of liquidity, in particular versus the 3- and 10-year contracts. A lot of bonds with maturities of 15 years and up are held for long time periods, he noted in this regard.
‘This I think reflects considerable fund manager interest for liability matching purposes, and therefore the re-positioning and trading in these bonds is at a much lower level than bonds shorter along the curve that are traded for a wider range of reasons’, he said.
The AOFM has ‘done everything we think we can as an issuer to support the 20-year futures contract, but ultimately its use comes down to market preferences’, he said. The AOFM has established the 2035, 2037, 2039 and 2041 maturities to support the ASX 20-year, as well as referencing it in some of those syndications, he said.
‘Over time, our 30-year benchmark bonds will roll down the curve to support the contract and we will continue to look for opportunities to tap existing lines’, he said. ‘When it comes down to it, though, I don’t think we as the issuer have any more control over its success than we have tried to promote to date.’
Turning to the impact of the Reserve Bank of Australia’s quantitative easing on liquidity in the secondary market, Nicholl said it was not yet clear that the effect was generally noticeable, although ‘there are certain bond lines that would be extremely tight’, such as the April 2024.
‘We are not aware of any dysfunction that would cause us as the issuer any specific concern, although we are aware that liquidity of the ASX’s 3-year futures contract has been impacted by the YCC operations’, he said. ‘Depending on whether the RBA decides to extend its YCC target beyond the April 2024, we expect this tightness to dissipate over time.’
With regard to the possibility that ownership by the RBA as a portion of the entire market, now at some 22%, could increase to 35-38% before QE ends, he said:
‘I think we are a long way from that scenario to be honest, and in any case we are not treating the RBA’s QE purchases as a constraint on where we issue, so if we start to see market reaction to tightness in bond lines further out along the curve from the YCC target, we can (and have) responded to that with new issuance’, he said.
‘But it is really market conditions giving rise to these indicators in my view, rather than the RBA’s operations per se, because there can be quite a lag between RBA purchases and then suggestions to us that we issue particular line that may look to be tight’, he continued. ‘And we might not even be asked to issue into some of these lines – the bond lines between the 3- and 10-year futures contracts have typically constituted a relatively “dormant” part of our market from year to year.’