SYDNEY - The Australian Securities Exchange (ASX) plans to soon launch a 20-year bond futures contract to help investors hedge long-term portfolio risks.
The new baby of the A$40 trillion ($30.85 trillion) derivatives market could also lower funding costs for some borrowers.
The Australian Government is extending its debt maturity as far out as 2037, so the ASX decided the time was right for a 20-year bond future, adding to its existing three- and 10-year contracts. "The number of bond lines and amount of issuance in the long end is now sufficient to support a 20-year bond futures contract," said the ASX, which is planning to launch the contract around September, following a period of market consultation.
Analysts say the new contract could easily garner A$3 billion a day in notional turnover, deepening the market and adding to liquidity. Across Asia, only Japan has a well developed market for futures as long as 20 years.
These contracts are often used to limit losses when markets move against an investor. Up to now, investors seeking insurance on ultra-long debt could only short sell the 10-year futures contract leaving the investor exposed to losses from a flattening or steepening yield curve.
A 20-year contract would solve that. "There was a significant maturity mismatch, so getting rid of that basis risk should be of help because the certainty is greater," said Adam Donaldson, head of fixed income strategy at Commonwealth Bank of Australia.
Just as importantly, the move should help lower funding costs over time as investors would be able to hedge more accurately and efficiently, said a dealer who asked not to be named because the subject matter was sensitive.
State governments and AAA-rated global borrowers are likely to benefit the most from this added liquidity because they tend to raise long-dated debt, said CBA's Adams.
Indeed, the average maturity of new issuance for state governments and supranational borrowers is around 8.5 years, compared with 4.8 years for domestic banks, according to Thomson Reuters data.
Another sector set to gain over time from a 20-year futures contract is infrastructure: Australia plans to privatise A$100 billion of state-owned assets nationwide and utilities tend to have long-dated liabilities, which would be well suited to hedging with the new futures contract.