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Aust readies 30-yr bond amid sell-off

AAP logoAAP 14/09/2016 By Marty Silk

The Australian government is issuing its first 30-year bond to help repay debts taken on to get through the GFC, but with global bond prices falling the timing seems amiss.

A global bond sell-off has been triggered this week by growing investor concerns central banks may finally be done with cutting interest rates and buying huge amounts of government bonds in their bid to lift growth.

The yield on Australian government bonds have risen from 1.85 per cent to 2.12 per cent since Thursday afternoon.

JP Morgan fixed income strategist Sally Auld said it's not a huge surprise as bonds have looked "very, very rich" for a long time.

"We've had this view that the market generally, globally was looking vulnerable to a sell-off and we've sort of got that," Ms Auld said.

"This backdrop suggests that ACGBs (Australian Commonwealth Government Bonds) remain vulnerable to further cheapening in coming weeks."

A continued fall in bond prices or rise in interest rates would increase the amount the government has to pay on it debt.

Against this backdrop, the Australian Office of Financial Management (AOFM), which auctions bonds for the government, announced on Tuesday it plans to issue its first 30-year bond in October.

Commonwealth Bank fixed income quantitative strategist Philip Brown said the government is clearly more concerned about the rising cost of refinancing debt taken on since the GFC than it is about temporary pricing volatility.

He said since federal budget deficits started piling up in 2008/09 the AOFM embarked on a huge bond and note issuance program to cover those costs.

AOFM issues jumped from $60.4 billion in 2007/08 to $420.4 billion in 2015/16.

Mr Brown said those bonds are now starting to mature and the government must issue fresh bonds to repay them, on top of financing the current budget deficit.

"Two or three years ago the amount of new bond issuance was predominantly whatever the deficit was plus a small amount of maturities from previous borrowing, but now the maturities from previous borrowings are getting much larger," he told AAP.

"And those costs will just keep growing in coming years."

AOFM chief executive Rob Nicholl said in his speech on Tuesday it was prudent to issue longer bonds now and hinted that his office would consider issuing even more.

"Trying to determine how hard we should push this objective is debatable, although I remain of the view that issuing regularly (even if not frequently) into the long-end will be beneficial," he added.

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