SYDNEY: Australia’s bond market is showing early signs of stress from the nation’s massive borrowing plan this year, but the effect is being obscured by strong demand from foreign investors diversifying from US treasuries.
Yields at debt sales have risen closer to levels seen in the secondary market, with the rolling average gap between them at the tightest level since October, according to a Bloomberg analysis of Australian Office of Financial Management (AOFM) data.
A gauge of demand for the nation’s government bonds has also fallen from this year’s peak, but it remains above a three-year average.
Slowing demand reflects the difficulty among investors to absorb fresh debt with the AOFM targeting bond sales of A$150bil (US$98bil) in the financial year through June 2026, up 50% from the last financial year.
It also risks pushing up borrowing costs for local authorities looking to fund key projects such as a new train line in Sydney and the 2032 Olympics in Brisbane.
“The step-up in this year’s increased issuance target is having some impact,” said Kenneth Crompton, head of rates strategy at National Australia Bank in Sydney.
“There is some fatigue. I’m not seeing this as the start of a concerning trend though,” he said, citing inflows from global investors seeking diversification.
Australian bonds have benefitted from investors diversifying from treasuries on concern over President Donald Trump’s policies.
Buyers from Japan as well as Taiwanese life insurers have been snapping up the Antipodean debt.
Nearly half of the A$16bil of government bonds maturing in 2036 were bought by foreign investors last month via a syndicated issuance, the highest allocation through such a sale since 2022.
Demand from offshore investors has also seeped into credit markets, spurring record issuance of Australian dollar-denominated notes by foreign issuers, known as Kangaroo bonds, in the first half of the year.
“There are issuers keen to diversify,” said Oliver Holt, head of debt syndicate and IG origination for Asia ex-Japan at Nomura Holdings Inc.
For trading, the Australian dollar credit market is much deeper than local currency markets in Singapore, Hong Kong or Japan, he said.
Australia sold A$1.2bil 2035 bonds yesterday and is due to issue A$1.15bil more in the remaining week.
Investors will be monitoring the demand for debt at these auctions after the Reserve Bank of Australia cut its key rate on Tuesday and signalled a “couple more” reductions to achieve its latest forecasts.
Meanwhile, the amount of outstanding local currency government bonds has already swelled by A$35.1bil in the first seven months of the year, based on AOFM data.
That’s a record except for during the pandemic in 2020 and 2021.
“We’re taking a step back to think about what it all means for the market and how much of this supply will be fully absorbed,” said Jessica Ren, an investment manager at Yarra Capital Management, who recently bought Australian government and state debt.
“We can only observe that over time.” — Bloomberg