Treasurer Media Release No. 58 2008: Increasing Commonwealth Government Securities to Bolster Australia’s Financial Markets

20 May 2008

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Today I announce that the Government will increase its  issuance of Commonwealth Government Securities (CGS) as part of the  Government’s commitment to the effective operation of Australia’s financial  markets.

The Government’s decision to increase issuance follows  consultations with market participants about the adequacy of the supply of  CGS.

The Rudd Government is committed to ensuring that  Australia’s financial markets continue to perform strongly and are a leader in  the Asia-Pacific region. The Australian  Government’s budget surpluses mean that we do not need to issue securities to  finance spending, but Treasury Bonds play a special role by providing the  lowest-risk, highest-quality instrument in financial markets.

Because they are risk-free, Australian Government Treasury  Bonds are the benchmark used by participants in Australia’s financial markets  to set interest rates beyond the short end of the yield curve, including in the  bond futures market. The Australian  Government is committed to ensuring that its bonds can play this role  efficiently.

The existence of an active and efficient bond market  alongside the banking system strengthens the robustness of Australia’s  financial system and reduces its vulnerability to adverse shocks.

The Government’s decision to increase CGS issuance is  consistent with the decision of the previous federal government, announced in  the 2003-04 Budget, to maintain the CGS market. In announcing that decision, the previous government  noted that “this will entail ensuring sufficient CGS remains on issue to  support the Treasury bond futures market”.

To maintain the important benchmarking role played by Government  bonds and ensure that the Government has the flexibility it needs to maintain  liquidity in the bond spot and futures market, we will provide legislative  authority for an increase in future CGS issuance of up to $25 billion.

Fixed-coupon Treasury Bonds worth around $50 billion  are currently on issue. The Government will  add around $5 billion to issuance during 2008-09 and monitor market conditions  to determine whether further issuance is required. The new issuance will increase the size of  existing bond lines and will add to the announced issuance program for  2008-09. The additional issuance of  around $5 billion will be in those bond lines that are in shortest supply  in the market, particularly mid curve stocks.

The Government is committed to strong fiscal discipline to  meet the needs of the economy as demonstrated by delivering the second largest  surplus in more than 35 years in last week’s Budget.

The Government remains firmly committed to delivering the surpluses  outlined in last week’s Budget.

The Government will place the proceeds of the increased bond  issuance with the Australian Office of Financial Management (AOFM). The AOFM is  the Government agency responsible for debt management.

The increase in CGS issuance will not adversely affect the  Government’s net financial worth since the increase in CGS will be fully offset  by an increase in financial assets on the Government’s balance sheet.

Because of the additional resources to be held by the AOFM, the  Government will change its investment powers to allow it to invest in a broader  range of assets than under its current mandate.

At present the AOFM invests in term deposits with the  Reserve Bank of Australia. By modestly widening the range of the AOFM’s investments,  it will be able to better offset the cost and risk of the additional issuance.

As a result, the increase in borrowings is not expected to  involve any net cost to Government. The  new investments would continue to be low risk.

I am also announcing changes to the operation of the  securities lending facility operated by the AOFM. This facility supports the CGS market by  allowing market participants to access bonds that are in temporary short supply. This helps smooth the operation of the  market. Under the changed arrangements,  the facility will be permitted to accept a wider range of assets as collateral. The change will allow the AOFM to accept  similar securities to those accepted as collateral by the Reserve Bank of  Australia in its market operations.

These initiatives are part of a package to strengthen  financial markets.

The final element of this package is to change the Interest  Withholding Tax (IWT) arrangements for State Government bond issuance. Bonds issued by State Governments will be  eligible for exemption from IWT.

This change is expected to improve depth and liquidity in  State Government bond markets and improve price discovery. A better functioning State bond market will  add to the attractiveness of these bonds, and allow them to make a greater  contribution to financial market stability, while resulting in only a small  reduction in revenue received by the Australian Government.

This suite of initiatives would be progressed quickly, with  a view to legislation being introduced and passed in the current sitting of  Parliament.

This demonstrates the Government’s determination  to ensure the efficient operation of Australia’s financial markets.

20 May 2008

Last updated: 4 March 2014