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Western Australian Treasury Corporation 2012 Annual Report - Page 16Western Australian Treasury Corporation 2012 Annual Report - Page 17
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CONTINUED ECONOMIC AND FINANCIAL MARKETS THE 10-YEAR COMMONWEALTH GOVERNMENT BOND YIELD BEGAN THE 2011/12 FINANCIAL YEAR AT 5.21 PER CENT AND TRADED LOWER THROUGHOUT THE YEAR TO FINISH AT 3.04 PER CENT, REACHING AN ALL-TIME LOW OF 2.70 PER CENT IN APRIL 2012. THE 3-YEAR COMMONWEALTH GOVERNMENT BOND YIELD OPENED THE YEAR AT 4.76 PER CENT AND TRADED DOWN THROUGH MOST OF THE YEAR IN A 297-POINT RANGE FROM 4.86 PER CENT TO 1.89 PER CENT, BEFORE CLOSING AT 2.40 PER CENT. THE AUSTRALIAN DOLLAR SPENT MOST OF 2011/12 TRADING ABOVE PARITY AGAINST THE US DOLLAR, REACHING A POST-FLOAT HIGH OF US$1.1080 IN LATE JULY 2011. FOR MOST OF THE YEAR, HOWEVER, IT TRADED BETWEEN US$1.0000 AND US$1.0500, WITH THE OCCASIONAL DIP BELOW PARITY AND A LOW FOR THE YEAR OF US$0.9390. FIGURE 3 BELOW SHOWS THE DRAMATIC DECLINE IN 10-YEAR GOVERNMENT BOND YIELDS IN ADVANCED ECONOMIES, IN MOST CASES TAKING THEM TO ALL-TIME LOWS. FIGURE 3: GLOBAL 10-YEAR GOVERMENT BOND YIELDS WATC PROVIDED ASSISTANCE TO BUSSELTON WATER ON THE CREATION OF A BORROWING POLICY. A VERY SUCCESSFUL OUTCOME WAS ACHIEVED, AND THE BOARD OF BUSSELTON WATER HAS ADOPTED A BORROWINGS POLICY BASED ON THE ADVICE SUPPLIED BY THE OFFICERS AT WATC. I HAVE FOUND ALL STAFF DEALINGS WITH WATC TO BE PRODUCTIVE AND THEIR LEVEL OF UNDERSTANDING OF THE VARIOUS ISSUES HAS BEEN DEALT WITH IN A HIGHLY PROFESSIONAL MANNER. NEILL ROWLANDSON MANAGER FINANCE & ADMINISTRATION BUSSELTON WATER (%) 7 6 5 4 3 2 1 0 US GERMANY UK AUSTRALIA JAPAN CANADA 14 WESTERN AUSTRALIAN TREASURY CORPORATION 30/06/2006 30/12/2006 30/06/2007 30/12/2007 30/06/2008 30/12/2008 30/06/2009 30/12/2009 30/06/2010 30/12/2010 30/06/2011 30/12/2011 30/06/2012 BUSSELTON JETTY
CAPITAL MARKETS ACTIVITY OVERVIEW WATC'S BORROWING ACTIVITIES DURING 2011/12 CENTRED PRIMARILY ON: • ISSUING ACROSS THE YIELD CURVE TO FUND LENDING TO ITS CLIENTS; • MAINTAINING SUFFICIENT VOLUMES ON ISSUE AND ENHANCING THE LIQUIDITY IN ITS EXISTING LINES OF BENCHMARK BONDS MATURING IN 2013, 2014, 2015, 2017, 2019 AND 2021; • EXAMINING OPPORTUNITIES TO ISSUE THROUGH ITS EURO MEDIUM TERM NOTE (EMTN) PROGRAM AND OTHER OFFSHORE MARKETS TO GENERATE TERM FIXED AND FLOATING RATE FUNDING; • ISSUING SHORT-TERM PAPER, EITHER THROUGH DOMESTIC INSCRIBED STOCK OR THE EURO COMMERCIAL PAPER (ECP) PROGRAM FOR LIQUIDITY FUNDING; • TRANSACTING IN INTEREST RATE SWAPS TO MEET WATC'S ASSET AND LIABILITY MANAGEMENT REQUIREMENTS AND TO GENERATE FLOATING RATE FUNDING FOR ITS CLIENTS; AND • BEING RESPONSIVE TO INVESTOR DEMAND FOR OFF-THE-RUN STOCKS, WHICH ARE FIXED INTEREST BONDS ISSUED INTO MATURITY DATES LONGER THAN BENCHMARK BOND MATURITY DATES. THE PRIMARY SOURCE OF WATC'S LONG-TERM BORROWINGS IS THE DOMESTIC FIXED INTEREST MARKET. LONG-TERM FUNDING, MAINLY THROUGH DOMESTIC BENCHMARK BONDS, COMPRISES APPROXIMATELY 73 PER CENT OF TOTAL BORROWINGS. WATC ALSO OPPORTUNISTICALLY ISSUES FLOATING RATE NOTES AND OFF-THE-RUN FIXED INTEREST BONDS WITH A VIEW TO BUILDING THESE INTO FUTURE BENCHMARK BOND LINES. OVERSEAS, WATC'S ONGOING STRATEGY IS TO TAP MARKETS ON AN OPPORTUNISTIC BASIS THROUGH BOND ISSUES, PRIVATE LOANS AND ITS RANGE OF CONTINUOUS NOTE ISSUANCE FACILITIES, SUCH AS ITS EMTN PROGRAM. WHEN BORROWING OVERSEAS, WATC AIMS TO: • SAVE ON THE INTEREST COST OF BORROWING, WHERE IT CAN OBTAIN FUNDING FOR THE BORROWING PROGRAM AT RATES BELOW EQUIVALENT DOMESTIC RATES AFTER HEDGING ANY FOREIGN CURRENCY EXPOSURE; • UNDERTAKE ISSUES IN A RANGE OF CURRENCIES, WITH SPECIFIC STRUCTURES OR OF PARTICULAR TERMS TO MEET ANY SPECIAL PORTFOLIO OR CLIENT REQUIREMENTS; AND • DIVERSIFY ITS INVESTOR BASE. LONG-TERM BORROWINGS DOMESTIC FIXED INTEREST VOLATILE GLOBAL FINANCIAL MARKETS PROVIDED WHAT, AT TIMES, WERE CHALLENGING ENVIRONMENTS FOR DOMESTIC DEBT ISSUERS. HOWEVER, THE ONGOING STRENGTH OF THE AUSTRALIAN ECONOMY, COUPLED WITH A RELATIVELY HIGH INTEREST RATE ENVIRONMENT COMPARED TO MOST OTHER DEVELOPED ECONOMIES, LED TO SIGNIFICANT SAFE HAVEN CAPITAL FLOWS INTO AUSTRALIAN COMMONWEALTH BONDS AND IMPORTANTLY, ALBEIT TO A LESSER EXTENT, SEMI-GOVERNMENT BONDS. THIS OFFSHORE DEMAND, COUPLED WITH ONGOING DEMAND FROM BANK BALANCE SHEET MANAGERS AND DOMESTIC FUND MANAGERS, ENABLED WATC TO COMPLETE ITS REQUIRED BORROWING PROGRAM FOR THE FINANCIAL YEAR. WATC CONTINUED TO BUILD VOLUME AND LIQUIDITY INTO ITS BENCHMARK BOND LINES DURING THE YEAR, BOTH TO FUND CLIENT REQUIREMENTS AND TO PRE-FUND THE 17/07/2012 BENCHMARK MATURITY. NO NEW BENCHMARK BOND MATURITIES WERE CREATED DURING THE YEAR. IN MAY 2012, WATC SUCCESSFULLY LAUNCHED A SYNDICATED TAP ISSUE OF ITS EXISTING 8% 15/07/2017 BENCHMARK BOND, RAISING $1 BILLION. WATC APPOINTED ANZ BANK, UBS AG, AUSTRALIA BRANCH AND WESTPAC BANKING CORPORATION AS JOINT LEAD MANAGERS FOR THIS ISSUE. THE ISSUE RECEIVED STRONG SUPPORT FROM DOMESTIC AND OVERSEAS INVESTORS, WITH 60 PER CENT BEING PLACED WITH DOMESTIC INVESTORS AND 40 PER CENT WITH OVERSEAS INVESTORS. WATC ALSO UNDERTOOK ITS FIRST FLOATING RATE NOTE ISSUE FOR OVER A DECADE IN JUNE 2012, FOR $200 MILLION MATURING ON 25 JUNE 2016. THIS TRANSACTION WAS SYNDICATED AND LEAD-MANAGED BY WESTPAC. BY THE END OF THE FINANCIAL YEAR, BENCHMARK BONDS OUTSTANDING HAD INCREASED FROM $19.15 BILLION IN 2010/11 TO $22.93 BILLION IN 2011/12. THE NET INCREASE IS THE RESULT OF $5.34 BILLION OF NEW ISSUANCE AND $1.56 BILLION OF REPURCHASES. SPREADS BETWEEN YIELDS ON SEMI-GOVERNMENT BENCHMARK BONDS AND COMMONWEALTH BONDS TRENDED WIDER OVER THE YEAR, DUE PRIMARILY TO EXTRAORDINARY INVESTOR DEMAND FOR COMMONWEALTH BONDS ARISING FROM ONGOING CONCERNS WITH THE EUROPEAN SOVEREIGN DEBT CRISIS. FIGURE 4 ON PAGE 16 SHOWS THE MOVEMENT IN SPREADS FOR SELECTED WATC BENCHMARK BOND LINES TO THE EQUIVALENT COMMONWEALTH BONDS. ANNUAL REPORT 2012 15
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