AUCTION PREVIEW: ACGB Dec-34 Supply Due

The Australian Office of Financial Management (AOFM) will today sell A$700mn of the 3.50% 21 December 2034 bond, issue #TB168. The line was opened on 19 April 2023 for A$14bn via syndication at a yield to maturity of 3.635% and last sold on 24 May 2023 for A$800bn. The last sale drew an average yield of 3.7227%, at a high yield of 3.7250% and was covered 3.6250x. There were 43 bidders, 21 of which were successful and 13 were allocated in full. Amount allotted at the highest yield as a percentage of amount bid at that yield was 35.4%.

• This week's ACGB supply continues the recent run of relatively low issuance, consistent with the more favourable fiscal backdrop outlined in the Federal Budget. In 2022-23, Treasury Bonds issuance is expected to be around A$80 billion.
• Today’s auction occurs in the wake of the release of the June RBA Minutes. Despite not showing explicit dovishness, market sentiment was buoyed by subtle changes in wording regarding the necessity of additional tightening, along with the finely balanced decision on whether to raise interest rates or maintain the status quo.
• This change in sentiment towards to RBA policy outlook, along with a significantly higher outright yield compared to the previous offering, a low level of issuance, and the inclusion of the line in the XMM3 basket, which enhances hedging opportunities, should all work to deliver solid demand.
• The flattening of the yield curve may however potentially constrain the overall strength of bidding at today's auction. The 3/10 cash curve reached a new cycle low on Monday, marking the flattest level since 2010. Furthermore, its richness on the interpolated curve and the potential need to increase the line "up to size" may dampen demand.
• Results are due at 0200BST/1100AEST.