Gyroscopic Investing

Thought any Australians should be aware of this:

The Australian Government may at any time, subject to a minimum period of three months’ notice, convert holdings of eTBs to the underlying Treasury Bonds directly registered in the Commonwealth Stock Registry. If this occurred you would continue to receive the same Coupon Interest Payments and Face Value amounts you were entitled to with the eTBs but would not be able to sell your investment in Treasury Bonds on the Australian Securities Exchange (ASX). For example, the Australian Government could decide to convert holdings of eTBs to the underlying Treasury Bonds if the agreement between the Australian Government and ASX for the trading of Australian Government Bonds on the ASX is terminated.

Even if you get 3 months notice, you could imagine what would happen to the bond price if this was announced.
Full details here: https://australiangovernmentbonds.gov.au/etbs/risks/

Comments?

Thanks for bringing this to my attention. Definitely concerning.

Any ideas as to when the Government might be likely to exercise this option? Is there any precedent?

My first thought is "why would the Government care what price it is trading at on the secondary market?"

Just spitballing, some possible triggers:

* price is too high
* price is too low
* underlying is nearing maturity

Anything else?

Justin wrote: ↑Fri Oct 12, 2018 1:50 am Thanks for bringing this to my attention. Definitely concerning.

Any ideas as to when the Government might be likely to exercise this option? Is there any precedent?

My first thought is "why would the Government care what price it is trading at on the secondary market?"

Just spitballing, some possible triggers:

* price is too high
* price is too low
* underlying is nearing maturity

Anything else?

Hi Justin,

The only reason I can think of is to "hide" the market value of the bonds. If you cannot sell the bond on the exchange, and the Government doesn't buy them but lets them run to maturity, only the interest payments give a price signal as to their current value.

Bit of "tin foil hat" speculation. Etb's were introduced after the GFC as a means of getting more (read non-institutional) buyers into the market, perhaps in the next crisis, a non listed market value would keep at least some (less savvy) buyers of newly issued bonds present.

Hopefully other forum members can give a better theory.

Hal

ps: If you are specifically interested in Australia, try

https://www.macrobusiness.com.au
https://www.youtube.com/channel/UCKWDsc ... -bQ/videos. (esp the bail-in talks)

Regardless of what the government does, the secondary market will still exist, albeit with more trading friction. If GSBE47 is trading around 200 on the day the government decides to delist, offer yours on aussiestockforums.com for 199 and I guarantee you traders will find a way to purchase them before the day is through.

Also, you've got three months to roll them into something else. Something to check would be whether the market maker has to stick to their mandate. Even if they don't I doubt there will be a shortage of buyers.