Australian borrowers do the heavy lifting

At one stage in 2020 it seemed Australia’s government-sector borrowers might end up with funding requirements larger than the market’s ability to support them. By the time the sector’s biggest issuers came together at a KangaNews roundtable in early February 2021, however, tasks had mainly come under control and issuance was well ahead of the required run rate.

  • Vince Cinquina Head of Financial Markets WESTERN AUSTRALIAN TREASURY CORPORATION
  • Jose Fajardo Head of Funding and Liquidity QUEENSLAND TREASURY CORPORATION
  • Gavin Sinnott Senior Balance Sheet Manager NEW SOUTH WALES TREASURY CORPORATION
  • Fiona Trigona Head of Funding and Balance Sheet NEW SOUTH WALES TREASURY CORPORATION
  • Matthew Wheadon Head of Funding and Liquidity AUSTRALIAN OFFICE OF FINANCIAL MANAGEMENT
  • Laurence Davison Head of Content and Editor KANGANEWS
  • Matthew Zaunmayr Deputy Editor KANGANEWS

Davison How are issuers placed with debt requirements heading into 2021 and beyond?

WHEADON It feels like we are coming down the other side of the mountain. The Australian Office of Financial Management (AOFM) is now about 70 per cent of the way through the 2021 financial year funding programme. The pace of issuance required over the remainder of this financial year is much lower than it was through most of the 2020 calendar year. We will issue around A$75 billion (US$57.4 billion) in Treasury bonds over the six months to the end of June 2021. This compares with just more than A$200 billion in the six months from the onset of the pandemic last year. This is a much more comfortable pace for us.

Looking beyond the current year, the new-money requirement in the budget is forecast to fall significantly over the forward estimates.

TRIGONA At the end of 2020, following the state budget New South Wales Treasury Corporation (TCorp) announced a funding task of A$35.8 billion for the 2021 financial year. As of early February, we have raised just less than A$20 billion so we are comfortably around 56 per cent of the way through our funding task.

We will shortly give a mid-year update. [The update, released on 25 February, reduced TCorp’s funding requirement by a further A$6.25 billion to A$29.6 billion.]

FAJARDO Queensland Treasury Corporation (QTC)’s programme for this financial year is A$21 billion, which was reaffirmed at the release of the state budget in December. This also gave us forward guidance for three years, in which our annual funding task will average around A$21 billion. This is largely reflecting the government’s COVID-19 initiatives.

With our late-January issuance of a A$3 billion 2032 maturity bond, we have completed more than 75 per cent of our programme and we are in a good position to finish it ahead of schedule.

GULICH Western Australian Treasury Corporation (WATC)’s new borrowing programme is A$2.3 billion for 2020/21, which we will complete in the coming months. We are also focused on the March 2021 FRN [floating-rate note] and July 2021 bond maturities. The forward guidance from the recent mid-year review is that new funding requirements out to 2023/24 remain lower than previous years.

KELLY Treasury Corporation of Victoria (TCV)’s task this financial year is significant – A$45 billion was announced following the November budget. To date, we have completed A$33 billion so we are well placed heading into the second half of the year.

The treasurer of Victoria recently stated that revenue has rebounded sharply and that he expects Victoria’s budget deficits this financial year and next to be substantially lower than the A$23 billion and A$13 billion respective forecasts at the budget.

We are waiting to see how this will affect our funding requirement, but we noted in our update late last year that there was a chance some of this year’s requirement could drift into the 2022 funding year. I expect we will be able to release a market update toward the end of the March quarter.

KENNEDY South Australian Government Financing Authority (SAFA)’s gross long-term funding programme for this financial year is A$7.6 billion, of which A$1.3 billion was prefunded in the 2019/20 financial year. Of the A$6.3 billion remaining, we have raised A$5 billion to date – including a new 2034 line established in February.

We are making good progress for our 2021 financial year requirement. There is some heavy lifting to come over the forward estimates to 2023/24 based on the budget forecasts released in November, with total SAFA outstanding debt projected to rise to A$37.5 billion from its current A$25 billion. We will provide our regular monthly funding updates to lay out our issuance intentions.

“State budgets were based on scenarios and assumptions with a high degree of uncertainty on how the virus would act and the pace of economic recovery. We now have the situation across the country where both the health and economic results are likely to be better than those assumptions.”

Davison What factors have contributed to issuers being able to get ahead of the funding run rate?

KELLY TCV went very hard very early on its funding task, raising around A$11 billion in March-April 2020 and about A$39.6 billion in total since the onset of COVID-19. Our view, as it always is when we think a crisis is about to unfold, was to surround ourselves with as much liquidity as we could.

We have not really taken the foot off the pedal since then. Our objective is to remain well ahead of the funding curve and continue to maintain a strong liquidity position.

On the budgetary side, it looks like revenue will be better than originally forecast. One of the challenges when you deliver a budget in November is to deliver the expected expenditure in the next 6-7 months. I suspect this will result in a lower funding requirement than originally forecast.

FAJARDO QTC has had larger borrowing programmes than the other states for a while. We have always made a conscious effort to be ahead of the run rate and this financial year has been no different. Market conditions have been very good, reflecting the Reserve Bank of Australia (RBA)’s initiatives to improve market functioning and that demand dynamics have been robust. This has allowed us to push tenders above A$500 million and also to achieve A$3 billion in a syndication with a good-quality orderbook.

TRIGONA All the states faced a challenging funding task last year, and we all wanted to get ahead of what was needed and to make the most of opportunities. Market conditions have been good and our preference is always to issue into strong demand.

GULICH When state budgets were set in October and November 2020 they were based on scenarios and assumptions with a high degree of uncertainty on how the virus would act and the pace of economic recovery. We now have the situation across the country where both the health and economic results are likely to be better than those assumptions might have implied.

Equally, when you look at what is happening around the world it is not difficult to see that things could have gone the opposite way and our funding tasks could have been even higher. Being cautious and whenever possible looking to get ahead of the run rate for our funding tasks has been a prudent strategy.

Going long

New market dynamics have given Australian government-sector issuers an opportunity to increase long-dated issuance. They have taken advantage of this opportunity, though this segment of the market is not yet fully mature.

ZAUNMAYR It seems wrong to talk about silver linings, but we should acknowledge that the COVID-19 crisis has made longer-tenor debt available in much greater volume for borrowers. To what extent has liquidity in Australian Commonwealth government bonds (ACGBs)pushed out past 10 years and how far along the curve does it go for semis?

WHEADON We have put a lot of work into developing the market beyond the 10-year basket. This is a key part of the ACGB investor diversification story. However, the reality is that liquidity is still shallower and less consistent at longer-dated points than in the 10-year basket.

Looking forward, the bulk of our funding will continue to come from the sub-12 year sector. In the right circumstances, however – and we saw this last year for our A$15 billion (US$11.5 billion) 2051 syndication – the ultra-longs can certainly make a material contribution. Liquidity has improved and the data show this in the form of greater turnover, but it is still a fraction of what we see in the 10-year basket. We did around 10 per cent of our funding in 2020 in ultra-long bonds.


We cannot keep issuing into short-dated lines. We have some good reverse enquiry, which has allowed us to consider seeding further issuance of longer-dated maturities. But we are naturally being driven there by the refinancing risk we are carrying.


Zaunmayr The Australian economy in the main appears to be rebounding more quickly than might have been expected, notwithstanding a number of small, localised COVID-19 outbreaks and lockdowns over the summer months. What feedback is the AOFM getting from investors when it comes to economic performance and forecasts?

WHEADON We have had a lot of investor engagement in the last 10 months. We have done around 170 separate investor meetings and have more in the pipeline over the next few weeks.

We find investors are generally very well informed on the Australian macro story and we get very little push back on the government’s forecasts. Most have a view that Australia’s trajectory is a bit different from the rest of the world given our control of the virus. This is seen as a strong positive.

Zaunmayr Did TCorp have any conversations with investors around the economic impact of the outbreak of COVID-19 and resulting Northern Beaches lockdown over the Christmas period?

SINNOTT The way the New South Wales (NSW) government handled the Northern Beaches outbreak was commendable especially given the time of year. Questions on the economic impact have not arisen, and any that investors do have should be addressed after the government delivers its half-year review.

Zaunmayr Victoria had the longest period of economic and physical lockdown in 2020. Has TCV had much specific investor engagement around Victoria’s particular experience of COVID-19?

KELLY We did our post-budget presentation and funding announcement in November and dealt with a lot of these questions then.

Most of the conversations we have had since then have been supply-based. This is feeding into people’s views on TCV bonds and relative value to our peers. I think the focus this year will remain on supply relativities in the sector and this will influence participation in the primary and secondary market. I get the feeling investors are confident with the economics.

“We have had many one-on-one meetings with investors and found from the onset of COVID-19 that they were all very understanding about the uncertainty we were facing. Investors have been very supportive throughout the past year, evidenced by how well advanced we all are with our funding tasks.”

Zaunmayr To what extent are investors focused on the specific projects and productive outcome of fiscal stimulus?

FAJARDO It is a focus although I think generally investors prefer to see how a broad range of initiatives play out over time, rather than just looking at the pace of economic growth or growth in different sectors.

It is a focus for the Queensland government. The budget papers devoted an entire chapter to the importance of enhancing productivity and competitiveness through this recovery process.

Zaunmayr With smaller populations, South Australia (SA) and Western Australia (WA) tend to get less news-cycle attention. Are there any idiosyncrasies about state economies that borrowers are communicating to investors?

GULICH Investors are aware that WA is in a different fiscal position from the other states with the budget remaining in surplus and the economy growing throughout the course of 2019/20.

The queries we had when we did our budget update were primarily around what the further upside to state finances could be. Most investors follow commodity prices closely and have seen where iron ore is tracking compared with conservative budget assumptions.

We still have a small new-debt requirement, as the government is committed to delivering a large infrastructure programme to support ongoing economic recovery.

Similar to other states, investors are expecting to see downside to our estimated funding programme as a result of the stronger-than-expected economy. In addition to royalties, we have seen our other revenue lines improve, including taxation receipts and increased transfer from the Commonwealth government through improved national goods and services tax pool estimates.

We do not always fly under the news radar. For example, in the first week of February international media picked up WA’s bushfires, floods and COVID-19 lockdown. This gets profile internationally and can be taken out of context, so we sometimes need to do some mythbusting in investor relations.

KENNEDY SA has largely been able to fly under the radar except for a short period in November when there was a snap lockdown that hit the wires. Our borders have been more open than WA but less so than other states. But this aside, there have not been many news headlines apart from the potential impact of Chinese tariffs on the wine industry.

Some positive themes have emerged. SA has fared well from the influx of expats returning home, which has had an impact on housing and retail. SA is also rolling out a large infrastructure plan that is helping underpin the economic recovery as the state recovers not just from COVID-19 but the bushfires of 2019-20 that affected many communities in the state.

Zaunmayr NSW and Victoria were both downgraded from triple-A by S&P Global Ratings at the end of 2020, but this did not appear to have much of an impact on pricing or access to markets. Are ratings less important to investors given the new market dynamics post COVID-19?

TRIGONA The impact of the rating action was minimal. We launched a transaction the day after the downgrade and had A$3 billion of interest for a A$2 billion deal.

Some investors had to digest what the rating downgrade meant, and we probably had a 2-3 basis points new-issue concession on the transaction. However, the syndication we undertook on 4 February was flat to our curve and had no pricing premium.

SINNOTT In pricing terms, even before the rating action the market had moved to a credit-agnostic landscape where spreads were all within 2-3 basis points depending on the name.

TCV probably experienced a slightly greater pricing impact on the day as it had a two-notch downgrade, but investors moved on very quickly.

KELLY There had been some pre-positioning in the lead up. The two-notch downgrade was a bit of surprise but so was the limited impact – we only widened by around 6 basis points on the day and took back 2 basis points the next day. For me, this reinforces that the real game in town for the semi-government sector is relative supply.


Zaunmayr To what extent are borrowers still looking at downside risks related to COVID-19?

GULICH Treasury departments certainly remain very cautious in forecasting economic parameters and revenue updates. I think borrowers have become comfortable with how the Australian and state governments have managed the crisis so far, and understand the upside and downside risks.

In WA, a clear upside risk is the ongoing strength in commodity prices and volume as well as a pickup in employment and housing expenditure relative to budget assumptions, weighted against the downside risk of further virus outbreaks.

SINNOTT The potential for further outbreaks, such as what occurred in the Northern Beaches of Sydney in late December, is a key downside risk. This brought a large part of the city to a halt over the Christmas period, which is obviously not good for the economy. The virus is not truly beaten anywhere until it is beaten everywhere, and this will be an ongoing risk throughout 2021. The vaccine rollout is another key risk given its effect on the timeline for reopening borders and economies. The upside risk would be a better-than-expected health outcome from vaccine rollouts that could result in a boost to consumer confidence.

Moreover, downside risks are being managed very well. The borrowing task that was handed down in the November NSW budget remains until we get more clarity at the upcoming half-year review.

FAJARDO Another potential risk over the medium term relates to the large infrastructure programmes being undertaken by all the states. This could be a downside risk if costs were to increase above forecast.

WHEADON I agree that downside risks from the virus are likely to persist, but I would point out that we have firm fiscal forecasts that have been revised and re-evaluated by federal Treasury several times since July 2020. From our role as the government’s cash manager, which gives us a window into how the budget is tracking in real time, I have a lot of confidence that the fiscal baseline underpinning our borrowing programme is credible.

On the other side of the ledger, relatively conservative budget assumptions around vaccine rollout and commodity prices like iron ore could surprise on the upside as well.

“It feels like we are coming down the other side of the mountain. The AOFM is now about 70 per cent of the way through the 2021 financial year funding programme. The pace of issuance required over the remainder of this financial year is much lower than it was through most of the 2020 calendar year.”


Zaunmayr How have issuers adapted their methods of communication with investors in this volatile period?

WHEADON After an initial intense period of communication with investors last year, when uncertainty around our funding task was very high, our engagement is now more business-as-usual. We continue to update investors regularly via teleconference and VC, which complements our market updates and other communication channels. I think our situation is well understood by investors.

FAJARDO We have had many one-on-one meetings with investors and found from the onset of COVID-19 that they were all very understanding about the uncertainty we were facing. Investors have been very supportive throughout the past year, evidenced by how well advanced we all are with our funding tasks. We have also seen new investors in our syndicated transactions.

Given our increased funding task, investors have mainly been keen to understand our strategy and how we plan to implement it as well as whether this involves any substantial changes from what we have done in the past.

We are beginning a virtual roadshow programme in late-February 2021, which will start with investors in Japan.

SINNOTT The nature of communication is really the only thing that has changed. We still do one-on-one meetings but they are mostly done via VC instead of face-to-face. Where we can, we are trying to meet in person again – and we hope this can continue.

Davison There has been some talk in the market about borrowers’ approach to reverse-enquiry issuance. What are commitments on this issuance format and how prominently does it feature in funding plans?

KENNEDY We are a smaller issuer so reverse enquiry does not feature as prominently in our plans as in those of the larger states. We are open to reverse enquiry for our longer-dated, illiquid lines. Our strategic objective is to continue to communicate our benchmark issuance intentions openly and transparently to ensure we maintain access to markets.

FAJARDO We have had discussions with the market around reverse-enquiry issuance. It is an important part of our funding programme. Following these conversations and along with others in the sector, we are now publishing daily updates of our outstanding volume to give additional transparency on our activity.

However, at QTC the majority of funding is typically through syndication and tenders – we have undertaken more than 60 per cent of our funding this financial year in these public formats.

CINQUINA Reverse enquiry is an important part of our toolkit. We also update the market daily, which is positive for all investors in the semi-government market. We get positive responses from investors that can take advantage of this reverse-enquiry capacity and see it as a good liquidity point they cannot get in other markets.

KELLY The challenge for us as a sector over the last couple of months has been to get certain parts of the buy side to understand what drives us to respond to reverse enquiry. It is about accessing liquidity points and meeting the needs of our investors, particularly offshore investors. It is also about lining up the requirements of our borrowing clients with the requirements of our investors.

Reverse enquiry has been a big part of issuance in the semi-government sector for 30 years and will remain so going forward. There is no doubt it is paramount to achieving efficient funding. We have added some information on our website that outlines our issuance practices to help explain this.

SINNOTT Reverse enquiry has always been important for TCorp. In the past, we updated the market intra-week whenever there was a material change in our issuance. We have now also moved to a daily update.

We are a frequent borrower with a large programme and we are always open to reverse enquiry. The nature of our business means loans are at our clients’ discretion and we need the flexibility to meet drawdowns when they occur. Equally, reverse enquiry is important to our investors – who value the flexibility it offers when FX or yield targets are met at a specific point in time.

Benchmark foreign-currency issuance: the last word?

Larger funding tasks and lack of competing issuance from Australia’s major banks might, at the margin, make benchmark-sized foreign-currency issuance by Australian states more likely. The reality is that this type of funding is still very much a last resort.

ZAUNMAYR Foreign-currency issuance emerged as a much more relevant funding option in 2020, albeit not in benchmark form. How significant is the near-absence of the major banks from wholesale funding markets and the consequent impact on the cross-currency basis?

KELLY The major banks’ absence has certainly helped us on the cross-currency basis swap. However, whether it is euros or the Australian dollar long end, the scenario remains that it is very opportunistic. Our view on foreign-currency borrowing is that it needs to provide something the domestic market cannot. It is always our preference to borrow in Australian dollars but we will consider foreign currencies if they can give us tenor, volume or price that we cannot otherwise get.

FAJARDO We consider offshore funding as part of our strategy of smoothing and extending our maturity profile. We are more likely to consider foreign currency in benchmark size at the 10-year point of the curve.


Zaunmayr Are there any novel or innovative issuance methods by which borrowers are looking to meet their higher funding tasks? This could include a commitment to larger green, social and sustainability (GSS) bond programmes.

KELLY The key through this whole process has been flexibility. The way we have approached the higher aggregate funding task as a sector – through duration, foreign currencies and back-filling the curve – has been very good. In times of stress, we need to be open to all options within reason, to provide the flow we need when we need it.

GSS is something we are still looking at internally to determine the most appropriate method to come to market. We are updating our framework and we will be back in the market eventually. Clearly, there are some solid examples in this group of the success GSS bond issuance has had in the last 12 months.

TRIGONA We established our GSS programme in 2018, we now have A$5.2 billion outstanding and we intend to increase issuance into this programme over time. However, the benchmark-bond programme remains the major source of funding for TCorp.

GULICH Our benchmark-bond programme also remains our main source of funding, supported by floating-rate note (FRN) issuance. We will look also at opportunistic funding in longer-dated debt whenever it arises.

GSS issuance is not part of our current funding strategy. Similar to TCV, we have a lot of work to do on our framework and how the state sits in regard to environmental, social and governance (ESG) concerns so investors can have confidence in any future GSS issuance.

FAJARDO There is nothing novel for QTC: it is more just an evolution from having a larger borrowing task. We maintain a programmatic approach to issuance, although we are now much more frequent with tenders. We have had six tenders already this financial year, which is twice as many as the previous financial year. The size of our tenders has also risen.

Our larger borrowing task and outstanding volume mean we have a focus on smoothing and extending our maturity profile. Prior to COVID-19, we issued a 2034 benchmark line and we have since seen demand in the 20-30 year part of the curve.

We are talking with our borrowing clients about the benefits of extending duration and then being able to fund in the longer part of the curve. As such, we have been able to issue more than A$4 billion in ultra-long tenor.

As Paul Kelly said, it is all about having flexibility in the type of issuance we do – whether it is FRNs, green bonds or tenor – to meet investor demand.

WHEADON GSS bond issuance is not currently a consideration for the AOFM, though we do maintain a watching brief on developments. Unless there is a policy initiative from government, this will not change.

Zaunmayr Semi-government issuers have historically expressed concern about GSS issuance potentially reducing liquidity in the mainstream curve. Does this evaporate in an environment of much greater issuance?

KELLY Yes. We have always been vocal about protecting liquidity in our benchmark bonds. But as our programme grows and outstanding volume in each benchmark line increases, the need to protect liquidity no longer exists. This definitely gives additional opportunities to broaden our funding and investor bases, as well as to help the government meet its own stated GSS objectives.

TRIGONA We see our GSS programme as complementary to our benchmark programme. It does not compete for liquidity, especially with the size of our funding task now.

FAJARDO For QTC it has really been about how we can increase liquidity in the green-bond product. We are seeing increased demand for GSS bonds, so we are looking at how we can expand the eligible asset pool to provide more issuance to investors. We are looking at assets in areas such as waste management and low-carbon transport.

We recognise green bonds will be an important part of our funding strategy going forward, but we expect they will remain a similar proportion of our total issuance to what they are now.

Davison There was much talk during 2020 about the social aspect of ESG finance. Have issuers noticed more engagement from investors in this space?

TRIGONA There was a lot more social-bond issuance in 2020 and a few COVID-19 bonds as well. TCorp did not want to issue a specific COVID-19 bond as it could lead to reporting issues in a few years’ time when the world has hopefully moved on from the pandemic. The intent of our programme is to deliver on broad social and environmental outcomes rather than focusing on the pandemic response.

KELLY Social and sustainability bonds probably have more appeal than they did 12 months ago and, similar to green bonds, would now fit more easily into our larger borrowing programme and help us achieve greater investor diversification.

FAJARDO We could introduce a number of social assets to our pool, but our strategy is more focused on supporting the transition to a low-carbon economy and environmental sustainability. Therefore the ‘E’ part of ESG remains a greater focus for us.

Andrew Kennedy has spoken often about the fact that by nature we are all social issuers, in that the majority of government spending is on social services such as health and education. This is embedded in our benchmark-bond issuance.

Zaunmayr SAFA’s point of difference is its AONIA-linked issuance. In 2020 it executed a three-year deal as well as multiple short-dated trades. Is SAFA getting investor diversification from this programme or is it still more about risk management?

KENNEDY It is worth noting that risk-free rate (RFR) issuance is not unique to the local market – it is just something that has not yet taken off in Australia to the same degree as offshore markets where IBORs [interbank offered rates] are being phased out by regulators and RFRs are becoming the dominant reference rates.

It remains the case that alternate benchmarks is the way the RBA has been looking for things to develop. We will continue to be responsive to and supportive of this.

Moving out on the curve to three years from one year did widen investor interest. It brought new investors into the AONIA product and new investors to SAFA. We saw this as a good way to diversify our funding and investor base, so these were wins from that perspective, as well as improving alignment in our risk management profile.

AONIA-linked issuance will remain part of the suite of products we use for funding. We are considering where on the curve we will look to issue next, and whether we move to quarterly coupon calculation from the monthly format. This seemed to help entice investors into participating in our three-year transaction.

Zaunmayr When we had this conversation last year the feedback from other borrowers on AONIA-linked deals was that they were interested observers but had no plans to issue. Have views changed?

TRIGONA We have not been focused on AONIA-linked issuance over the last 12 months but we have been very focused on the RFR and what this means for the bank-bill swap rate.

SAFA has certainly done important work with AONIA-linked issuance and many more market participants are now aware of the issues in this space. Offshore markets have been focused on this area for many years and we know there is more work to be done on it domestically.

CINQUINA We have not done a lot of work in this area in the last 12 months. Implementing a new treasury-management system was a priority for us in 2020. We intend to investigate how AONIA-type issuance would be managed in the new system but have no plans for this type of funding in the short term.

KELLY Rather than AONIA-linked transactions, our focus has been more about ensuring we are in a position to handle all the changes to fallback clauses, whether it be for cash or derivative products. I do not think we will be lining up an AONIA-linked deal in the near term at least.

“We launched a transaction the day after the downgrade and had A$3 billion of interest for a A$2 billion deal and we probably had a 2-3 basis points new-issue concession on the transaction. However, the syndication we undertook on 4 February was flat to our curve and had no pricing premium.”


Zaunmayr The RBA has been a massive player in the high-grade market since March last year and was key in re-establishing market functionality. What level and type of communication is there between issuers and the central bank with regard to its activities and borrowers’ issuance plans?

WHEADON There was a lot of dialogue with the RBA through March and early April 2020 when the market was dislocated – at that point it was almost daily contact. The focus was on the health of the bond market and in particular on having a clear understanding of the blockages.

We still share our thoughts with the RBA on the functioning of the market from time to time – but far less frequently than last year and more as a general overview rather than as part of any regular and subject-specific discourse.

I should point out that we do not coordinate with the RBA on the conduct of its QE and yield-curve-control programmes. The RBA undertakes these independently and separately to the AOFM. The same is true of our funding activities for government. Monetary policy and debt management are run separately.

TRIGONA We have always had a good relationship with the RBA and at the beginning of the pandemic we had been having weekly meetings for some time. With the onset of the RBA’s QE programme, we now have fortnightly meetings to give guidance on our activities and what we are seeing in the market. But we do not make recommendations.

Davison It has been suggested in some quarters that the RBA might be able to get more bang for its buck by having more flexibility in how strongly the taps are on week to week, in order to smooth out any periods of buying or selling. Would borrowers like to be involved here?

WHEADON That is not a conversation the AOFM would have with the RBA.

KELLY As Fiona Trigona has already mentioned, the purpose of our conversations – given the RBA is one step removed from markets – is to provide a sense of what we are seeing in primary and secondary liquidity. We do not recommend what the RBA should or should not be doing in its QE programme.

Zaunmayr Since the RBA began a broader QE programme in November last year, yield has risen – particularly at tenor longer than 10 years. What has caused this and is it possible to estimate how much further yield may have widened if the RBA had not expanded its activity?

FAJARDO The RBA estimates the effect to be worth around 30 basis points. Numerous factors have contributed to yield rising, including Joe Biden winning the US presidency and what this means for US government spending as well as the announcements on several vaccines at the end of 2020.

I see the effect of the RBA’s QE programme clearly in how well markets are functioning and how much semi-government bonds have flattened to the government curve since November, particularly in the bonds the RBA is actively buying. The curve has flattened out to 10 years and then steepens from there.

SINNOTT We are hostage to the global rates backdrop and Australian yields have backed up relative to the US. We were trading through US Treasuries at the time of the November RBA meeting and now we are trading over.

However, we are still seeing strong demand and the statistics from our syndication on 4 February bear this out. We had 45 per cent distribution to offshore, which was a record for any syndication we have done.

“We saw 30 per cent of our 2025 deal distributed offshore. These are numbers we have not experienced before. This diversity of demand across the curve gives us confidence that conditions will remain conducive to semi-government issuance.”


Zaunmayr Banks were very prominent investors in the first semi-government deals to come to market during the COVID-19 crisis. But by the end of 2020 asset managers seemed to have come back into high-grade deals in size, particularly longer-end transactions. What observations do issuers have about the shape of demand through 2020 and into the new year?

KENNEDY In this world where one-on-one, face-to-face investor engagement has been much more difficult to do – particularly with offshore investors – we rely a lot more on our panel banks to provide feedback rather than some of the mechanisms we have used previously.

The attitude and approach from offshore investors seems consistent with how it always has been. Australia is part of their investment mandate and they look to use Australia as an add-on to their portfolios because it is a small but important part of the global bond index.

They are comfortable with the yield, the economic story and the outlook for the country, the credit rating and the currency – despite its appreciation. There appears to be appetite from offshore investors. They understand QE is not just an Australian phenomenon and we have seen investors move their horizons further out along the curve over a period of time. We have also seen some investors become interested in bespoke transactions such as the longer-dated maturities.

KELLY There is strong evidence from the second half of January that investor demand is strong scross the curve. Our recent 2025 transaction had more than A$6.5 billion of bids and QTC’s 2032 deal in January had A$5.8 billion of bids. Demand from domestic real money is strong and bank balance sheets are there when the deal suits. The big mover has been demand from offshore real-money accounts.

We saw 30 per cent of our 2025 deal distributed offshore. These are numbers we have not experienced before. This diversity of demand across the curve gives us confidence that conditions will remain conducive to semi-government issuance.

FAJARDO More than 40 per cent of our last two transactions has been allocated offshore. This has helped drive the books to large volume overnight.

There are strong demand dynamics from the extension of QE, attractive yields, demand for high-quality liquid assets and tight spreads in credit product due to lack of supply.

Counteracting this is how tight spreads are out to 10 years. Our spreads have come in by 20 basis points since October 2020, which is a large move.

TRIGONA Our statistics are similar. The green bond we issued in November had 42 per cent distribution to offshore investors and, as Gavin Sinnott mentioned, the deal we issued on 4 February to increase our 2033 line had a record 45 per cent. To put this in perspective, in February 2020 we issued the 2033 line for the first time with 28 per cent distributed offshore.

Zaunmayr If there was a sustained period during which offshore demand was not as strong, are borrowers confident domestic buyers would have enough demand capacity to support the sector’s much larger aggregate funding task?

WHEADON We have an extremely large and diversified investor base. Waxing and waning interest among different investor cohorts is normal and because of this diversity it is very rare that they will all be doing the same thing at the same time. If one group is selling, there is typically a buyer on the other side and funding keeps on happening.

We have no specific concerns about investor demand and we are seeing good engagement from every sector, on- and offshore, be it balance sheets, hedge funds, reserve managers or fund managers.

FAJARDO Offshore investors have many different motivating factors. While at one point issuance may not work for an investor from a currency perspective, it may work for another from a hedge or outright rates perspective. If someone is selling, generally someone is buying for other reasons.

Zaunmayr WATC’s task does not require as much new money as the other states due to the particular circumstances of WA’s economy. Is WATC seeing similar themes to the others in investor engagement with its bonds?

CINQUINA We are seeing the states reap the benefits of the last five years or more of marketing the semi-government sector as a whole and individually to domestic and particularly offshore investors.

The last fixed-rate syndicated deal we undertook was in May 2020, when Australia was emerging from the first phase of COVID-19. Even then, we had 25 per cent distribution to offshore accounts.

Given what we are seeing in our peers’ syndications and from what we hear from our panel banks, there is clearly strong demand coming from offshore. Some of this appears to be concentrated in the ultra-long end but anything in the 10-15 year space seems to get good interest. We are certainly seeing similar demand for our name through our panel.

Zaunmayr Some conflicting factors could affect bank balance-sheet demand over the next few months, including revisions to the RBA’s committed liquidity facility (CLF) and the removal of the term-funding facility. Will these offset one another or could there be incremental changes either way to balance-sheet demand?

SINNOTT The regulatory piece, specifically the existence of the CLF, is broadly supportive of the sector. However, when we bring a syndicated transaction we cannot assume that bank treasuries will always participate. Their involvement is governed by various factors including duration, asset-swap levels and spread to bond.

We are seeing an increase in turnover of our bonds in the secondary market from bank balance sheets. This reinforces the points made around reverse enquiry, so we have the flexibility to issue into this demand when it arises.

Turnover in our programme during the six months to the end of December was around A$71 billion, compared with A$107 billion for the whole of financial year 2020. This is a good barometer for the health of the market as it means risk is being recycled when it comes back, for example from any offshore selling.