AOFM open to 30 year bonds

The Australian Office of Financial Management is considering a further lengthening of the yield curve, locking in borrowing costs for up to three decades.

In a speech in Sydney on Tuesday, AOFM head Rob Nicholl said the government agency was "open to the prospect of a further [yield] curve extension, including to 30 years."

Nicholl said that a "recent announcement by the ASX of its intention to introduce a 20 year futures contract offers, from our perspective as the issuer, a positive development opportunity for the AGS market."

A 20-year futures contract was "a logical step in the evolution of the Australian fixed income market generally", he said.

In recent months the AOFM has issued A$14 billion in new bonds that have to be repaid in 2033, 2035 and 2037.

"If we were to extend to 30 years that could possibly involve two further maturities beyond a 20-year futures contract basket as a new long term pattern of issuance was established to support a 30-year curve," Nicholl said.

"Before proceeding with a further extension we will require confidence that appreciable amounts can be readily absorbed and that reasonable opportunity would exist to re-issue into those lines.

"While I am not prepared to put any parameters around that now, what I will say is that we are facing circumstances under which the risks associated with extending to 30 years would appear to have been reduced."

Nicholl added that consolidating a 20-year Treasury Bond benchmark and the introduction of a new futures contract would give the AOFM "even greater impetus to maintain this part of the yield curve."

"Subject to market conditions we also plan to launch a new 2039 maturity with a view to building it to a benchmark size before entering a 20-year futures contract. From our perspective this should send a clear signal that we view long-end yield curve development of continuing importance and that we see the establishment of a 20-year futures contract as a positive market development."

Nicholl said longer-term debt would "insulate the budget from the near-term impact of rising yields."

"Rising future yields will only impact the marginal cost to Government of future issuance - not the cost of the stock that has already been issued."

The introduction of the 30-year sector, both for nominal bonds and inflation linked bonds was in line with this objective, he said.