NICHOLL After the big global sell-off in late 2016 Australian Commonwealth government bond (ACGB) yields retraced this rise progressively over about six months. This coincided with the second half of our biggest issuance programme to date, so we were pleased to see strong and steady demand throughout 2017. The results of our syndications and tenders show that there has been solid underlying demand.

TRIGONA I agree that it felt throughout 2017 that the market was in good shape for our issuance. The positive conditions were in evidence for us as early as March, when we issued a new 2027 bond that was oversubscribed and certainly put aside any lingering questions about liquidity.

COLLARD Funding conditions for high-grade issuers and other well-rated credits remained very accommodative during 2017. This was partly driven by a continuation of the desire for high-quality credits by investors during a period where globally there were ongoing uncertainties – for example the election of a new US president, Brexit ‘indigestion’ and the sluggish European economic recovery.

LOFTING Treasury Corporation of Victoria (TCV) wasn’t active in funding markets until later in 2017 – we did a A$500 million (US$397.7 million) tender of our 2028 bond in October - as prior to this we were still digesting the funds from the sale of Port of Melbourne. We could easily have done a larger transaction when we returned – we just didn’t need additional funds.

CINQUINA Western Australian Treasury Corporation (WATC) was quite active in the market throughout 2017. The observation I would make is of the surprising strength of investor interest we found, especially in the second half of the year as evidenced by the results of our syndications. From our perspective it has been particularly pleasing to see more aggressive interest out of the domestic real-money sector. This is certainly a positive dynamic, alongside the good demand for semi-government securities in general.

FAJARDO The support for issuance from both domestic and offshore investors has been very strong. This has allowed us to get ahead of our programme: we have issued A$6 billion in the current financial year, predominantly in the long end.

LOFTING One other thing I’d note is the change in apparent capacity for our group of issuers to issue at around the same time. Three of the states issued around the 10-year mark close together in 2017, and the market digested this without any real problems. I’m not sure we’d have had the same experience, particularly in the long end of the curve, at any previous point.

KENNEDY There was a good combination of factors at play. Rates had backed up internationally and offshore uptake was very positive. We had a similar experience to what Jose Fajardo describes when it comes to the offshore participation in the new 10-year syndication we executed in February 2017 – the largest international participation in the book for one of our deals for many years. We certainly experienced a widening and deepening of our investor base around this time.

LOFTING I think the fact that yields had backed up, especially in the long end of the curve, certainly helped. Our experience was that the biggest area of demand growth was from Asian investors in the very long end.

TRIGONA Our curve widened more than the US in the 10-20 year segment, which prompted offshore investors to look hard at Australian dollars beyond 10 years. New South Wales Treasury Corporation (TCorp) also issued a 2037 bond in 2017 – our first 20-year transaction – and offshore participation was important in this deal, too.

TRIGONA Our borrowing clients have themselves been lengthening, so this type of issuance is something we have wanted to do anyway. Overall rates are also still very low, so it’s clearly a good time to issue.

FAJARDO It’s similar for us. We’ve had a strategy of smoothing and extending our maturity profile in place for some time, to reduce our refinancing over time. This, combined with client requirements, has given us capacity to issue in the long end.

LOFTING As TCV has been absent from long-term markets for a few years we need to do some work to re-establish the back end of our yield curve. Our clients want to borrow at 10-years or longer duration, too – they are building long-term infrastructure so they want long-term funds.

TRIGONA We certainly had capacity to take advantage of market conditions. We issued A$3 billion at the very long end in 2016/17,while buying back short-term bonds.

LOFTING We always try to maintain our access to markets and our liquidity but there is only so far we will go to do so, given any additional debt is still a cost to the state. Ultimately, what we want to do is link our client funding as closely as we can with what we issue. We prefund at the margin, but we won’t get years ahead of the issuance task.

FAJARDO We have taken prefunding opportunities in the past. Once we have completed our funding task we may look at issuance opportunities if the market is supportive. We have certainly had positive feedback on this approach over the years we have used it.

NICHOLL We have certainly prefunded over the past few years, for a number of reasons. One is that we have had a run of syndications that were a lot larger than expected – in this case we weigh factors like the additional cash we are carrying and the benefit of regular supply into the market. We tend only to update our issuance rate twice a year and the market has come to expect consistent supply from us. Calibrating our regular issuance against the costs and benefits of prefunding at times – of taking more volume when it is ‘on the table’ – is something we constantly consider.

KENNEDY As a smaller borrower we feel there is more benefit to us from being transparent in our programme and sticking to what we say we will do. Having investor confidence around when and how our supply will come to market has been a long-term positive. We also probably lack the balance-sheet capacity to run too far off programme, at least compared with some of the larger states.

CINQUINA We don’t usually fund years in advance, but we do undertake some prefunding - largely of loans we know are coming in the next three months or so.

FAJARDO It’s a dynamic that has definitely been talked about, especially the element of increased semi-government supply. But it’s still a positive environment given the supply of ACGBs is poised to fall quite significantly.

NICHOLL We only have one more syndication this financial year, but next year we will have at least three new maturities to do – some of which will be issued by syndication.

TRIGONA In the last couple of years we have witnessed an increase in the fund size for some of the Australian fund managers. These are existing investors with increased appetite for our issuance, especially in the long end. The impact of this phenomenon has been quite significant.

FAJARDO Two specific areas I would highlight as sources of demand growth are Asian life-insurance companies and central banks in Europe. There are also investors in Latin America, Europe and parts of Asia that we have seen diversify their ACGB holdings into the semi-government sector.

CINQUINA WATC has had quite substantial issuance growth over the last 5-7 years and our offshore marketing was minimal prior to the removal of interest withholding tax on domestic semi-government bonds in 2008. This changed reasonably quickly, and we certainly now see offshore investors as a critical element of our marketing.

NICHOLL It’s the same for us. We have a core base of investors in the US but overall I would say the US remains underrepresented in the ACGB market.

FAJARDO We had significant success in our syndicated issuance when we first introduced the 144A documentation, with a lot of US investors coming into our books. It has been more sporadic of late, and I agree with the observation that these buyers have been less active than those from other jurisdictions.

NICHOLL As I just noted, we have meaningful investor representation from the US but don’t see much potential, at this point, for this to grow much further – or at least not as much as in other parts of the world. I did an investor update in the US in 2017, and they were undoubtedly less concerned about the Australian story compared with 3-4 years ago – but Australia certainly didn’t seem to be a priority. We seem to be flying under the radar in the US to some extent.

NICHOLL I’ve been surprised at the change in European demand in the past three or four years, actually. It started as a central-bank story but has developed to reflect our curve extensions. We have seen a lot more European pension and hedge-fund money entering the market, to the point that London is now the second most important city for us – behind Tokyo – as an aggregated source of demand. I did three trips to Europe in 2017 and still didn’t cover all the investors I could have seen.

TRIGONA We are seeing investors from parts of Europe we never expected to see. But this is part and parcel of good investor relations work globally – you meet investors you weren’t previously familiar with, and in time some of them come into your curve. The ticket sizes we have seen from Europe have certainly surprised on the upside, though.

FAJARDO There is still lots of potential in Asia, as well – and it’s not just Japan. We recognise the importance and potential of the broader Asian investor base and remain highly focused on marketing to the region.

NICHOLL There are a lot of insurance funds in Asia with the potential for expanded appetite. This is an investor category that in my view has been underrepresented in the past.

NICHOLL Not necessarily – and in fact one of the barriers to greater participation from this sector remains currency fluctuation and the cost of hedging. There is also the fact that some of these investors have had bad historical experiences in Australian dollar investments, especially during the Asian currency crisis. But I remain of the impression that there is potential for more funds to flow to Australian dollar fixed income.

LOFTING As a rule, Asia ex-Japan investors tend to be very yield-sensitive, though – this is certainly the case for insurance flow. Japanese demand tends to be more reliant on pension funds and therefore it has largely been a regular flow of money.

KENNEDY The reality is that every individual deal attracts a different investor base depending on its timing, yield and tenor. We don’t go into any transaction with preconceived ideas about where it’s going to sell, and we have ended up with some very unusual and diverse investors in books in which we would never have expected to see them.

NICHOLL Yes – we consider our curve-extension work to be finished. We will maintain a 30-year curve but we see no merit, and in fact a number of risks, in trying to go beyond this point. We are aware that some European sovereigns have issued even longer-dated bonds. But our view is that this is largely opportunistic and driven by the desire to lock in low interest rates rather than to sustainably extend yield curves.

NICHOLL We think the WAM of the portfolio will most likely remain around its current level – about 7.5 years – even as the new-issuance task declines. We don’t have specific portfolio targets at this point in time but it’s an open question as to whether we should once again develop a benchmark portfolio, as was the case prior to 2008.

NICHOLL We are aware of the basket trade but it’s not a focus for us. We know there are short-end buyers, including some investors that are only short-end buyers. The buyback programmes are there primarily to help us manage funding risk, and are a useful way of taking stock off the hands of intermediaries’ trading books – which in turn allows them to support liquidity in other parts of the curve.

LOFTING We hope that as the AOFM’s issuance declines it becomes more concentrated at the longer end of the curve. We certainly want the AOFM to maintain its efforts to back-fill the ACGB curve from to 20 from 30 years – there are still gaps in this tenor.

NICHOLL AOFM curve extensions have certainly broadened the long-dated Australian dollar investor base, and as those investors become familiar with the Australian market they tend to broaden the range of assets they look at.

FAJARDO We are seeing investor breadth come through not just in our primary issuance but also in long-dated secondary turnover.

LOFTING I think the impact on pricing of having the AOFM present at the long end is the most important factor. We always used to have conversations about the fair price for long-dated TCV issuance, and being able to see where an ACGB trades is a big help in this respect. This said, there is still plenty of debate about relative pricing - we discussed fair value for our 2040 issue for several months before issuing.

COLLARD We also receive enquiry from investors around long-dated maturities. Export Finance and Insurance Company aims to match-fund its assets and therefore we would quite happily issue in the longer part of the curve – if we were funding a long-dated project. Given our explicit guarantee by the Commonwealth, we expect that any long-dated issuance would be received favourably by the market.

KENNEDY It’s worth noting that while the AOFM’s net issuance task is declining the gross programme is still a big number. There will be ample liquidity for an extended period unless there is a turnaround in the federal government’s fiscal position on a scale that I don’t think anyone is predicting.

TRIGONA Our goal when it comes to duration is to maintain what we have already achieved – or perhaps to go a little longer.

FAJARDO We had a strategic goal of bridging the gap between our 2028 maturity and the 2033. We have achieved this with the introduction of our 2030 benchmark, and going forward I don’t envisage we will issue benchmark bonds longer than the 2033 for at least the next year.

TRIGONA We are actively issuing into maturities from 2027 to 2030, so investors can cherry-pick which bond they want. Liquidity is continuing to grow at the back end of our curve.

CINQUINA Going back five or six years, WATC had quite a short WAM but we have done a lot of work to extend it – it is close to four years at this point. We are reasonably comfortable with where we are at this stage, because we don’t have borrower clients with the desire or need to go to 15-20 year debt maturity.