AUD Rates: Supply has peaked, demand hasn’t – HSBC

In view of the analysis team at HSBC, the key takeaway from the Australian 2017/18 Budget, which was handed down last night, is that bond issuance has peaked and is projected to fall 21% (53%) in gross (net) terms in the next fiscal year.

Key Quotes

“This was broadly in line with our expectations but arguably better than some bond investors who had been fearing higher debt issuance to fund infrastructure investment. We think fiscal concerns are overdone as the government’s commitment to the Triple-A rating should keep consolidation on track.”

“There are also positives on the demand side. The recent sharp rise in bid-cover ratios has coincided with higher yields, suggesting that there is a sizeable investor base looking to ‘buy on dips’. In addition, our analysis of the foreign holdings data indicates that talk of the demise of the foreign buyer is exaggerated. In particular, we see potential for Japanese inflows on both an FX-hedged and unhedged basis.”

“Against this highly supportive demand and supply back-drop we recommend extending duration through 10-20yr ACGB flatteners at 64.5bp, targeting 51bp, with a stop at 72bp. This segment of the curve looks particularly steep relative to peers and is also supported by today’s announcement from the Australian Office of Financial Management (AOFM) that the launch of a new 2041 bond will be delayed until early 2018/19 rather than at the end of 2017, as previously planned.”