THE Australian government will be forced to boost bond sales as revenue drops, testing demand in the second-biggest sovereign market among stable top-rated nations.
Bond sales will total $53 billion in the 12 months ending June, according to the average forecast of seven analysts surveyed by Bloomberg, or 18 per cent more than the government estimated in October. Australia will run a deficit of $12 billion after the government dropped in December a pledge to return the budget to surplus, the poll shows.
"There will be political mudslinging if the government estimates a deficit for this fiscal year, but for markets none of that mud will stick," said Joshua Williamson, a senior economist at Citigroup in Sydney. "There is a shrinking world of AAA assets out there and now with the UK being downgraded by Moody's, it just makes Australian AAA assets more attractive."
With Canberra's mining tax generated less revenue than forecast this has exacerbated a budget shortfall that the government has said was also caused by a weaker economy, lower prices for commodity exports.
At the same time a strong Australian dollar is curbing tax receipts. Investor appetite for Australia's debt will remain strong as the government's finances still compare favourably with most other developed nations, Citigroup said.
The government is facing a revenue shortfall of about $5.9 billion, Treasurer Wayne Swan said last week, after admitting in December that "a sledgehammer hit" to revenue made a surplus unlikely this year.
A deficit in the 12 months ending June 30 will compare with the $1.08 billion surplus forecast in October. The government recorded a $44 billion deficit last fiscal year.
The minerals resource rent tax, which puts a 30 per cent levy on iron ore and coal profits, raised just $126 million in its first six months, trailing targets.
Australia's $262.8 billion in government securities is the largest market after Canada among sovereigns with stable AAA grades from all three major ratings companies.
Moody's Investors Service stripped Britain of its top score last week. Moody's has negative outlooks on its Aaa ratings for Germany and the Netherlands.
"In this environment, the Australian government shouldn't have a problem financing a modest slippage in finances," said Tony Morriss, head of interest rates research at Australia & New Zealand Banking Group in Sydney. "We don't see a reason for a significant blowout in deficits."
Investors bid for 4.76 times the January 2018 Australian federal securities offered on February 22, compared with an average so-called bid-to-cover ratio of 3.77 for 2012, according to data from the Australian Office of Financial Management, the government's funding arm.
The office updates its bond program twice a year along with the budget announcement and the mid-year review. Its chief executive, Rob Nicholl, said: "If the bond-issuance program needs to be updated for the current year, it would be updated as part of the 2014 budget announcement."
Australia's benchmark 10-year bond yield fell three basis points this month to 3.42 per cent. Three-year bond yields declined four basis points this month to 2.78 per cent.
Ten-year yields have risen from a record low 2.698 per cent in June as offshore investors cut holdings of the nation's securities. The proportion of total debt held by international investors fell to 72.2 per cent as of September, from 76.6 per cent three months earlier.