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18-04-2015, 04:51 PM
Bonds print first negative rate
Jonathan Shapiro
571 words
17 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Australia has this week joined the illustrious list of governments that have been able to borrow money at negative interest rates.
The Australian Office of Financial Management, which manages the government's debt programme, sold $200 million of inflation-linked bonds maturing in 2018 to 13 investors on Tuesday at a yield of -0.0763 per cent. It was the first time the government set the price of a new bond that implied a negative return for investors.
At Tuesday's auction of 2018 bonds investors bid the bond price up so that the implied rate was slightly below zero. This meant investors were paying up because they expect the Reserve Bank of Australia to cut the current cash rate of 2.25 per cent to below inflation, which is currently at 1.7 per cent.
Investors pay a price to own the bonds and in return get a rate of 1 per cent plus a rate linked to the Consumer Price Index, which they receive when the bond matures in 2018. Excluding the gains tied to the inflation rate, they would get back less than their initial investment.
The "inflation-linked bonds" are distinct from more common nominal bonds and reflect expectations of "real", or inflation-adjusted rates available in the market. These bonds, known as "linkers" pay a fixed rate of interest, but subsequent rates, and the final amount due to investors on maturity is adjusted periodically to reflect moves in the consumer price index measure of inflation.
Westpac's head of bond and inflation trading Andrew Barrelle said that the negative yields on inflation-linked bonds are a reflection of "very low cash rates and easy monetary policy".
"It's a reflection that the market expects the cash rate will go to 2 per cent and possibly below. If you take the 2018 nominal bond yield of 1.80 per cent and an inflation expectation of 2 per cent - which is the bottom of the [Reserve Bank's target] band, you will end up with a negative real yield of -20 basis points," he said.
"If the RBA does ease rates to 2 per cent or below and inflation expectations went up you could get a situation where the real yield moves more negative."
Tamar Hamlyn, principal of specialist inflation bond fund Ardea Investment Management said that with the market forecasting an inflation rate of 2 per cent and a Reserve Bank cash rate of around 2 per cent over five years, it summed to a "real" rate of zero in the inflation linked bond market.
"The biggest factor that has changed has been the cash rate. When you look at the main contributor [to real rates], it's not inflation, it's just that rates across the economy have fallen," he said.
The government has about $25 billion of inflation-linked bonds on issue compared with $330 billion in nominal bonds. Australia's nominal bond rates are still in positive territory and though they're near all-time low rates, are substantially higher than yields of other highly rated governments, particularly shorter-term rates which are close to zero or negative in Europe, the US and Japan. "Australian real yields have been very high in comparison with the US and UK over recent years, but as the RBA lowers the cash rate, the yields are converging," Mr Barrelle said.
Fairfax Media Management Pty Limited
Document AFNR000020150416eb4h00018
Jonathan Shapiro
571 words
17 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Australia has this week joined the illustrious list of governments that have been able to borrow money at negative interest rates.
The Australian Office of Financial Management, which manages the government's debt programme, sold $200 million of inflation-linked bonds maturing in 2018 to 13 investors on Tuesday at a yield of -0.0763 per cent. It was the first time the government set the price of a new bond that implied a negative return for investors.
At Tuesday's auction of 2018 bonds investors bid the bond price up so that the implied rate was slightly below zero. This meant investors were paying up because they expect the Reserve Bank of Australia to cut the current cash rate of 2.25 per cent to below inflation, which is currently at 1.7 per cent.
Investors pay a price to own the bonds and in return get a rate of 1 per cent plus a rate linked to the Consumer Price Index, which they receive when the bond matures in 2018. Excluding the gains tied to the inflation rate, they would get back less than their initial investment.
The "inflation-linked bonds" are distinct from more common nominal bonds and reflect expectations of "real", or inflation-adjusted rates available in the market. These bonds, known as "linkers" pay a fixed rate of interest, but subsequent rates, and the final amount due to investors on maturity is adjusted periodically to reflect moves in the consumer price index measure of inflation.
Westpac's head of bond and inflation trading Andrew Barrelle said that the negative yields on inflation-linked bonds are a reflection of "very low cash rates and easy monetary policy".
"It's a reflection that the market expects the cash rate will go to 2 per cent and possibly below. If you take the 2018 nominal bond yield of 1.80 per cent and an inflation expectation of 2 per cent - which is the bottom of the [Reserve Bank's target] band, you will end up with a negative real yield of -20 basis points," he said.
"If the RBA does ease rates to 2 per cent or below and inflation expectations went up you could get a situation where the real yield moves more negative."
Tamar Hamlyn, principal of specialist inflation bond fund Ardea Investment Management said that with the market forecasting an inflation rate of 2 per cent and a Reserve Bank cash rate of around 2 per cent over five years, it summed to a "real" rate of zero in the inflation linked bond market.
"The biggest factor that has changed has been the cash rate. When you look at the main contributor [to real rates], it's not inflation, it's just that rates across the economy have fallen," he said.
The government has about $25 billion of inflation-linked bonds on issue compared with $330 billion in nominal bonds. Australia's nominal bond rates are still in positive territory and though they're near all-time low rates, are substantially higher than yields of other highly rated governments, particularly shorter-term rates which are close to zero or negative in Europe, the US and Japan. "Australian real yields have been very high in comparison with the US and UK over recent years, but as the RBA lowers the cash rate, the yields are converging," Mr Barrelle said.
Fairfax Media Management Pty Limited
Document AFNR000020150416eb4h00018