Australia to Issue up to 50% More Bonds

CANBERRA, Australia -- Australian Treasurer Wayne Swan said Canberra will increase its bond issuance by as much as 50% in an effort to boost liquidity. In the bond market's most significant change since 2003 -- when the previous government committed itself to a liquid bond market despite no longer needing to raise debt -- Mr. Swan said the federal government will issue about A$5 billion (US$4.75 billion) in extra Commonwealth Government Securities in the year starting July 1. It also will pass legislation authorizing total additional issuance of as much as A$25 billion, he said. The move, which will increase the total supply of sovereign bonds to as much as A$75 billion, follows weeks of consultation with market participants. Mr. Swan also said that bonds issued by state governments will be exempt from interest withholding tax. Analysts said that should boost the attractiveness of state or semigovernment bonds. Canberra also will make it easier for market participants to borrow federal bonds from the Australian Office of Financial Management by widening the types of collateral accepted. Bond-market participants welcomed the changes after earlier this year lobbying the government for extra bonds as the global credit crunch exacerbated an already tight supply. "This is what we asked for," said Paul Bide, head of debt markets at Macquarie Bank and chairman of the Australian Financial Markets Association's market-governance committee. Australia has run large budget surpluses since the mid-1990s, allowing it to reduce the value of its bonds from a peak of nearly A$96 billion in 1997. But a lack of liquidity has bedeviled the market for years, as the size of the market was static. The global credit crunch encouraged a rush for risk-free assets, such as government bonds, straining supply even further. Foreign investors hold about two-thirds of Australia's government bonds, leaving a relatively small amount for Australian funds and banks, which use the bonds for, among other things, collateral with the central bank. The government has no debt in net terms and maintains a pool of physical bonds to support liquidity in three- and 10-year futures and to provide a benchmark for other interest-rate markets.