Goldman Sachs Group Inc. (GS) is returning to Australia’s bond market for the first time since 2006 to take advantage of relative yields on financial debt hovering at about the lowest level in three years.
The fifth-largest U.S. bank by assets sold A$1.25 billion ($1.35 billion) of 5 1/2-year notes yesterday, including A$500 million of floating-rate bonds priced to yield 205 basis points more than the bank bill swap rate, according to data compiled by Bloomberg. The extra yield investors demand to own Australian dollar bank bonds instead of government debt has shrunk 37 basis points this year to 157, compared with a drop of 31 on U.S. financial securities to 175, Bank of America Merrill Lynch indexes show.
The New York-based bank follows JPMorgan Chase & Co. and Bank of America Corp. (BAC) in returning to the so-called kangaroo bond market, which shut to financial issuers in 2008 after the collapse of Lehman Brothers Holdings Inc. spurred investors to shun all but the safest debt.
“It is a sign of market health that Goldman can consider issuing in Australia,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, who helps manage about A$14 billion of fixed-income assets. “I expect more financial kangaroo sales.”
Basis Swaps
While Australia’s benchmark interest rate of 4.75 percent compares with near zero in the U.S., the currency swaps market is offering discounts to borrowers as they switch the proceeds into U.S. dollars.
The five-year Australian dollar basis swap, which measures the cost of switching interest based on the London interbank offered rate, or Libor, for payments linked to Australia’s bank bill swap rate, was at 20.3 basis points in Sydney today.
It peaked at 48 basis points in November 2009, and has averaged 21.7 this month, compared with an average 8.6 for the five years to 2007. The higher the level, the greater the discount for overseas borrowers selling debt in Australia.
The spread paid by Goldman Sachs, rated A by Standard & Poor’s, compares with the 113 basis points that Australia & New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corp. each paid on five-year bonds last week, data compiled by Bloomberg show. Both Australian companies are ranked AA, three rungs higher than Goldman Sachs.
Previous Sale
Goldman Sachs paid a 51-basis-point spread over swap rates when it issued A$200 million of 10-year 6.35 percent kangaroo notes in March 2006, part of an offering that totaled A$1.65 billion and was the lender’s last sale of the securities, the data show. The notes were last quoted at a spread of 182 basis points, ANZ prices show.
Kangaroo bond sales surged to a record A$37.3 billion last year as the swaps market cut funding costs for issuers once proceeds were exchanged into U.S. dollars. The World Bank and Germany’s Landwirtschaftliche Rentenbank were among the top borrowers.
The World Bank’s International Bank for Reconstruction and Development sold A$600 million of 5.5 percent October 2014 notes on Jan. 18. The securities were priced to yield 49.25 basis points more than similar-maturity government debt, Bloomberg data show.
That rate equated to about 10 basis points less than Libor, once swapped into U.S. dollars, the data show. In June, the IBRD priced $2 billion of floating-rate bonds due July 2011 to yield 5 basis points more than Libor.
Hayley Morris, a Sydney-based spokeswoman for Goldman Sachs, didn’t immediately respond to two telephone requests for comment on yesterday’s sale.
Growth Forecast
The Reserve Bank of Australia, which kept its target rate at 4.75 percent last week, expects the economy to expand 4.25 percent this year, the fastest pace since 1999. It’s banking on a rising currency to help curb inflation.
Australian Treasurer Wayne Swan will release the government’s budget later today amid promises of “substantial” spending cuts. Swan, who delivers the budget to Parliament beginning at 7:30 p.m. local time, said earlier this week that the deficit in the government’s finances will widen in the fiscal year ending June 30 before increased mining revenue and an improving economy help bring about a surplus in 2012-13.
Australia’s dollar climbed 20 percent over the past year to $1.0786 at 8:18 a.m. in Sydney today, and touched $1.1012 on May 2, the highest since exchange controls were scrapped in 1983.
Consumer Prices
Consumer prices may rise an annual 3.11 percent in the next five years, according to the gap between yields on government bonds and inflation-indexed notes. The RBA aims to hold inflation between 2 and 3 percent on average.
The yield on the benchmark 10-year government bond dropped 1 basis point to 5.42 percent yesterday, or 225 basis points more than similar-maturity Treasuries.
The extra yield investors demand to hold Australian-dollar bank bonds instead of government debt fell to 154 basis points in March, the lowest since January 2008, Bank of America Merrill Lynch indexes show.
Kangaroo bond sales, which total A$16.2 billion this year, slowed from a record start after Australia’s banking regulator ruled that notes sold by top-rated borrowers such as the World Bank don’t qualify as assets lenders need to hold under Basel Committee on Banking Supervision rules.
RBC Capital Markets leads underwriter rankings with an 18 percent market share, followed by Commonwealth Bank of Australia with 11 percent, Bloomberg data show.
JPMorgan paid 135 basis points more than swap rates when it sold A$600 million of five-year kangaroo bonds in March, Bloomberg data show. It’s rated A+ by S&P, the fifth-highest investment grade.
Demand for the Goldman Sachs notes was “very strong” and the spread was fair, said Mark Mitchell, a portfolio manager and head of credit at Sydney-based Kapstream Capital, which manages about A$3.9 billion and bought the bonds.
“We would classify Goldman Sachs as being too big to fail in terms of their systemic importance in the U.S.,” he said. “We’re pretty comfortable having exposure to it.”
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