There are the Boxing Day sales, and there was this week’s rush of extremely cashed-up investors desperate to get a slice of this week’s rare 31-year government bond auction.
What’s a bond? What’s a bond auction? We’ll get to those shortly.
$15 billion makes it the third biggest bond sale in Australian history. The two bigger were recent – a $19 billion ten-year bond sale in May and a $17 billion five-year bond sale in July.
Each sale nets the government money it won’t have to pay back for five, ten or 31 years at rates of interest that until recently would have been unthinkably low.
The 31-year bond went for 1.94%. That means the foreign and Australian investors who bought them (including Australian super funds) were prepared to accept less than the usual rate of inflation right through until 2051 in return for regular government-guaranteed interest cheques.
Investors who bought ten year bonds were prepared to accept only 0.92% per year, investors who bought five year bonds, only 0.40%.
What’s a bond?
Even bond traders find it hard to get a handle on what bonds are. In his novel Bombardiers, author Po Bronson writes a scene where a bond trader refuses to work any more and demands to see an actual bond, “any kind of bond”.
He tells his boss he can’t sell bonds “if he’s never seen one”.
Like many things that used to exist physically, they’re now mainly numbers on screens, but it helps to get a picture.
This one is a US 27-year bond from 1945.
- ^ A$36.8 billion (www.aofm.gov.au)
- ^ $20 billion (www.afr.com)
- ^ $15 billion (www.aofm.gov.au)
- ^ More than a rate cut: behind the Reserve Bank's three point plan (theconversation.com)
- ^ Bombardiers (www.goodreads.com)
- ^ The Joe I. Herbstman Memorial Collection (www.theherbstmancollection.com)
- ^ 'Yield curve control': the Reserve Bank's plan for when cash rate cuts no longer work (theconversation.com)
- ^ office of financial management (www.aofm.gov.au)
Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University