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 (HK$239.5 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 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, the head of fixed income strategy at Commonwealth Bank of Australia.