As I told 612 ABC Brisbane Drive program host Steve Austin earlier this evening, the Australian Office of Financial Management (AOFM) had a good day today, running a successful $2 billion bond auction, selling $2 billion of bonds at a price which implied a borrowing rate of 0.245%. The AOFM is the Australian Treasury portfolio agency which borrows money (by selling bonds) on behalf of the Australian Government. You can listen to my conversation with Steve from 2:37:15:
612 ABC Brisbane Drive program, Monday 6 April 2020
Today’s bond auction was substantially over-subscribed, with $9.5 billion worth of bids having been made (check out the auction/tender results). This would have pleased the AOFM, which announced last Friday it now has to borrow $5 billion per week on behalf of the Government, rather than the $1.2-1.6 billion per week it was previously borrowing (See the AOFM’s Issuance Program Update). This is so the Government can fund its coronavirus rescue packages and to make up for lost revenue as a result of the social-distancing-induced recession.
In my conversation with Steve, I answered a question a listener asked Steve last week following my first conversation with him on this topic: who is the Australian Government borrowing from – i.e. who is buying the bonds? I referred to the AOFM’s excellent summary of the Australian Government Securities investor base on its website, which identifies fund managers, hedge funds, banks, and central banks as the major categories of investors. Among other things, I noted around 60% of Australian Government bonds are ultimately owned by foreigners (see chart below). Fortunately, the debt is denominated in Australian dollars so that’s not as bad as it first sounds.
There are currently around $560 billion of Australian Government bonds (excluding short-term Treasury Notes) on issue. In a few years’ time, that figure will very likely be in the order of $1 trillion – i.e. $1,000 billion (see this Australian article).
Now is a good time to (i) amend and extend the sovereign debt basically at a nil interest rate, and/or (ii) redeem as much sovereign debt as possible and replace with 20 year plus debt at these negligible rates. Cost of national infrastructure projects comes right down if the supply side can also be managed effectively in tandem with the cheap debt.
John, Treasury bonds aren’t redeemable at par, so what you’d save over the next 20 years via lower coupon rates you’d have to (more than) compensate current bond holders to entice them to let you ‘redeem’ their current investments. It would be like trying to slide out from a fixed rate mortgage after rates had fallen – your bank will charge you a break fee.
And you’re assuming you’d be able to find several hundred billions of dollars of demand for 20 year bonds.