How Much Will the New 30-year Government Bond Pay?

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How Much Will the New 30-year Government Bond Pay?

How much would you expect to earn on a 30-year investment? This week the Australian Office of Financial Management (AOFM) announced it was in the market to raise 30-year funds for the Commonwealth government.

The bonds will pay around 1.75% with maturity due June 2051. Pricing is yet to be finalised but expected to be 98 to 105 basis points (100 basis points = 1%) over the implied bid yield for the primary ten-year Treasury Bond futures contract – what a mouthful!

The new issue is expected to raise between $13 and $15 billion. That would put it in line with earlier issues of $17 billion over five years this month and the largest ever raise of $19 billion for 10.5 years in May as well as a shorter dated issue for 4.5 years of $13 billion, also in May.

The government has been borrowing at record levels to fund its support for pandemic related payments such as JobKeeper and JobSeeker.

The 1.75% for a 30-year investment may not look attractive but certain institutional investors have mandates requiring them to hold minimum allocations to AAA-rated sovereign investments. Other countries that meet the criteria have negative rates, while the US 30 year Treasury bonds yield 1.26%.

Our government net debt as a percentage of Gross Domestic Product (GDP) is also attractive. While it is forecast to jump from around 20% to 45% it is still well below other developed countries.

The AOFM reported 2019-20 Treasury Bond issuance to 30 June 2020, was $128.2 billion and Treasury Indexed Bond issuance was $1.65 billion. Guidance for 2020-21, until the October budget is announced, is for Treasury Bond issuance of around $4-5 billion in most weeks.

Assuming the AOFM issues in 50 weeks in the coming year, then issuance is expected to be between $200 and $250 billion, a significant increase over 2019/20.

The funds will support the budget deficit which is forecast to hit $185 billion or 9.7% of GDP, but could be higher if the government provides additional support related to the pandemic in its October budget.

The AOFM targets the most liquid maturity buckets for new issuance – 3, 10, and 20 years, see the graph below.

These bonds are fixed-rate so are subjected to significant interest rate risk given the very long term. To learn more about government bonds, see Government Bond Basics.

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Elizabeth Moran
Editor In Chief
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.

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