BOND sales in Australia are surging to the highest level in a year this quarter as banks, companies and foreign borrowers lock in raisings with relative yields tumbling at the fastest rate since September 2009.
Westpac led the banks, arranging $35.3 billion of offerings since January, more than double the amount in the previous three months and the most since the same period last year. US investment-grade sales rose 47 per cent to $US267bn.
Woolworths, Australia's largest retailer, sold the biggest non-financial bond since October last week as signs of momentum in the US helped revive confidence among Australian investors.
Money managers boosted holdings of Australian corporate notes last month to the most since 2009, helping bring down the extra yield on the debt by 40 basis points this year to 252 basis points, a four-month low, Bank of America Merrill Lynch indexes show.
The gap on company notes globally fell 69 to 198.
"Companies are trying to stay ahead of their immediate needs," said Simon Maidment, head of group funding at Commonwealth Bank. "Issuers are looking to access the market on the basis that there could be periods of heightened volatility again."
Westpac had 25 per cent of the market for organising sales, followed by ANZ, Commonwealth and NAB. The big four banks accounted for 69 per cent of the market when self-led offerings were included.
Non-sovereign borrowers in Australia have $45bn of domestic currency bonds due this year.
Commonwealth Bank is the third biggest issuer of Australian dollar bonds this year, selling $3.79bn of notes. The bank sold the first benchmark bond of the year in January when it raised $3.5bn from five-year fixed and floating-rate covered notes.
The floating-rate debt was priced to yield 175 basis points more than swap rates.
ANZ sold $2bn of floating-rate notes and $1bn of fixed-rate securities last Friday at 95 basis points over the benchmark swap rate. Each of ANZ's covered bonds matures in 2016.
Banks and financials owe almost half of the bond debt due this year. The banks have raised more than $10bn this year selling covered bonds -- typically lower-yielding and rated AAA because they are backed by a pool of mortgages -- after the government ended a ban on such offerings last year.
The premium that investors demand to hold bank debt rather than government bonds peaked at a more than two-year high of 312 basis points in December, Merrill Lynch indexes show. The average spread on bank bonds is now 261 basis points.
Elsewhere in Australia's credit markets, the Markit iTraxx Australia index of credit default swaps that gauges perceptions of corporate bond risk tumbled five basis points to 126 basis points yesterday morning, according to NAB. The gauge is set for its lowest level since August 3, according to CMA, which is owned by CME Group and compiles prices quoted by dealers in the privately negotiated market.
A drop signals improving perceptions of creditworthiness, which can reduce cost of funds.
Australia's benchmark 10-year bond yields rose 22 basis points last week to 4.23 per cent, the biggest advance since the five days to February 10. They rose three basis points to 4.26 per cent at 12.30pm yesterday, exceeding similar-maturity US Treasuries by 195 basis points.
The Australian dollar, the world's fifth most traded currency, was trading at about $US1.06 yesterday.
Traders see a 20 per cent chance that the Reserve Bank will reduce the benchmark cash rate to 4 per cent when the central bank board meets on April 3, cash-rate futures show. The RBA kept the rate at 4.25 per cent on March 6 after two consecutive 25 basis point cuts last year and said growth in the local economy would probably be close to trend.
Investor expectations for inflation in Australia across the next decade increased last week. The gap between yields on 10-year inflation-linked notes and bonds that are not tied to consumer price changes rose two basis points to 2.83 percentage points and reached 2.86 on March 15, the highest since August.
Woolworths led sales by non-financial companies, raising $500 million.
The seven-year bonds priced to yield 155 basis points more than the swap rate and were at 6.28 per cent on March 16, according to CBA prices.
"Woolworths is delighted to receive such strong continued support from our domestic investor base," Asrar Rahman, the group treasurer, said. The Sydney-based retailer was "pleased to have been able to achieve a benchmark-sized transaction in the seven-year tenor," he said.
"The key argument against Australia has always been that you can't execute, but this deal opened and closed in a short time with good and sensible pricing," said John Sorrell, head of credit at Tyndall Investment Management Australia in Sydney.
"The excuses for not issuing in Australia have been reduced." Foreign issuers sold the most Australian-dollar notes since July in February, and have raised almost $8bn through so-called kangaroo bonds this year.
The World Bank, Royal Bank of Scotland and Germany's KfW banking group led sales, with rates to swap Australian dollar debt into US dollars close to the most attractive in two years.
The five-year Australian dollar basis swap, which measures the cost of switching interest payments based on the London interbank offered rate for payments linked to Australia's bank bill swap rate, has climbed 12.3 basis points this year to 31.6 basis points on March 16, and reached a two-year high of 37 last month.
The higher the level, the greater the discount for overseas borrowers selling bonds in Australia.
The rate has risen in favour of kangaroo issuers as the nation's borrowers are on course to sell the most US-dollar bonds this quarter since the end of 2010.
Fortescue Metals Group sold $US2bn of high-yield bonds last week.
"If that so-called cross-currency basis swap stays at favourable terms, and spreads of our bonds versus Australian dollar swaps remain stable or tighten, borrowing costs will continue to be attractive," said Stefan Goebel, head of treasury at Frankfurt-based Rentenbank.
"I expect that there will be continued demand from investors for kangaroo products and also windows of opportunity where the swap works at an acceptable cost."
