The new game's bond as government revenue dips
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.
Frequently Asked Questions about this Article…
Analysts forecast about $53 billion in bond sales in the 12 months ending June — roughly 18% more than the government estimated in October — because lower-than-expected revenue (including a shortfall from the mining tax), a weaker economy and a strong Australian dollar have reduced tax receipts, forcing the government to raise more funding via government bonds.
The article notes a projected deficit (a poll-based estimate of about $12 billion for the year and Treasurer Wayne Swan citing a roughly $5.9 billion revenue shortfall), compared with a $1.08 billion surplus forecast in October. A bigger deficit means the government needs to issue more bonds to finance the gap, increasing bond supply.
The minerals resource rent tax — a 30% levy on iron ore and coal profits — raised only $126 million in its first six months, well below targets. That weak performance has contributed to the government's revenue shortfall and the need for increased bond sales.
Yes. Commentators in the article say investor appetite remains strong because Australia still ranks among a shrinking pool of AAA-rated sovereigns. Citigroup pointed to the reduced number of top-rated assets (and recent UK downgrades) making Australian AAA securities relatively attractive to global investors.
The benchmark 10-year bond yield fell three basis points to 3.42% this month while three-year yields declined four basis points to 2.78%. Demand at a recent auction was strong — investors bid 4.76 times the January 2018 federal securities offered on February 22, above a historical 2012 average bid-to-cover ratio of 3.77.
International investors held 72.2% of total Australian government debt as of September, down from 76.6% three months earlier. High foreign holdings matter because shifts by offshore investors can influence yields and the demand balance for Australian government bonds.
The article quotes market economists who are not overly concerned: banks and researchers say Australia’s finances still compare favourably with many developed nations, and they don’t see a reason for a significant blowout in deficits. That suggests bond financing is likely to remain manageable, though markets will watch revenue trends and commodity prices closely.
The Office of Financial Management updates the bond program twice a year alongside the budget announcement and the mid-year review. Its chief executive, Rob Nicholl, said any required update to the current year’s issuance would be made as part of the 2014 budget announcement.
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