STANDING COMMITTEE ON ECONOMICS - 26/02/2009 - Australian Office of Financial Management
Senator JOYCE —Can you give us a brief outline «of» the current international environment for the purpose «of» bonds, especially in light «of» floats by the United States, the UK and Europe? What is the market like out there at the moment?
Senator Conroy —It is hard to give a very succinct answer when a question is that broad.
Mr Neil Hyden, Chief Executive Officer—Firstly, there is a degree «of» turbulence in financial markets generally, which has been running since August 2007. Many major countries’ governments are having to undertake large issuance programs. The volume «of» issuance has increased to fund both weakened budgets and support measures «of» various sorts that governments are undertaking for their economies and their financial sectors. That issuance has been taken up fairly successfully overall, but there have been instances where bond tenders have not been fully covered.
Senator JOYCE —Can you give me an example «of» some «of» those bond tenders that have not been fully covered?
Mr Hyden —Germany had one in the last couple «of» weeks and another in the later part «of» last year, where the same thing happened. Failing to fully cover an individual tender is not in itself necessarily a huge problem. It is really whether the programs overall are meeting their targets in being able to fund the government. What we have seen have been isolated instances «of» lack «of» full coverage, rather than sustained or recurring problems. All «of» the countries in that category «of» large issuance see themselves as facing increased challenges in undertaking issuance.
Senator JOYCE —Facing increased challenges?
Mr Hyden —Yes, if they have got a large amount to place they need to do more work with their investors and, in particular, to assess which parts «of» the market and which instruments to give priority to.
Senator JOYCE —Is Australia also facing increasing challenges in getting people to purchase our floated bonds?
Mr Hyden —We have a much larger issuance program in prospect than we have had in recent years. We have already started that and have been undertaking two tenders a week «of» $600 million. Those tenders have been well supported; we have good coverage. There is no indication as yet «of» any weakness or any problem in funding. We started in a situation where our stock, Australian government bonds, had been in relative short supply in the marketplace. As you will recall, the government increased the issuance last year not to meet a budget funding need but because «of» the tight situation in the market. That situation is still apparent at present—that is, despite the increased issuance that we have started, there is still quite an appetite for our bonds. But that will change.
Senator JOYCE —Is there a sense «of» the prospective purchasers «of» our bonds cooling off as we issue more bonds?
Mr Hyden —There is certainly a question as to how far the appetite «of» investors will continue as the amount «of» stock «on» issue is increased.
Senator JOYCE —Do you do a study «on» how much we can issue before there is a definitive waning in people’s wish to purchase Australian bonds?
Mr Hyden —It is very hard to study that. Essentially what we do is talk to participants in the market, who are in the first instance the dealers’ intermediaries who actually buy the bonds at auction, and then the final investors behind them to gain some impression «of» their attitudes.
Senator JOYCE —Can you give us an example «of» who some «of» those financial intermediaries are?
Mr Hyden —They are Australian banks, branches «of» foreign banks operating in Australia and other financial institutions. They are the active players in our bond market.
Senator JOYCE —The people in the market who purchase these bonds are the same ones in the market purchasing US, German and other bonds, aren’t they? It is a global market for these instruments, isn’t it?
Mr Hyden —There is certainly a global market but it is not entirely an undifferentiated one, such that investors in Japan or Asia are not necessarily going to behave the same way as investors in the United States and Europe. But they clearly overlap.
Senator JOYCE —What is your view «of» how the United States will go raising their $790 billion in bonds?
Mr Hyden —They clearly have a large challenge.
Senator JOYCE —Has there been a sentiment, especially from China, as to their views «on» what these bonds are worth in the current economic climate?
Mr Hyden —I am not sure if you are talking about Australian bonds or American bonds.
Senator JOYCE —Any bonds—Australian, United States and other bonds.
Mr Hyden —They still have surpluses to place and reserves to manage. The question they face is which ones to buy. I think in that regard they will continue to be purchasers «of» Australian government bonds because «of» our high credit standing.
Senator JOYCE —Why?
Mr Hyden —Because «of» our high credit standing and their experience in the past «of» investing here.
Senator JOYCE —«Of» course, our credit standing would change if we ended up with an excessive load «of» debt, wouldn’t it?
Mr Hyden —It is clearly an important factor.
Senator JOYCE —We heard from Dr Gruen yesterday that, if we had around 80 per cent «of» GDP in Australia—about $900 billion—in debt, we would be categorised as having excessive debt.
Mr Hyden —$900 billion «of» government debt?
Senator JOYCE —Yes.
Mr Hyden —We are a very long way from that. One «of» the reasons for our high credit standard is our very low levels «of» debt.
Senator JOYCE —But we have passed an appropriation «bill» to allow you to draw up to $200 billion. That is correct, isn’t it?
Mr Hyden —Yes. It was legislation; it was not an appropriation «bill».
Senator JOYCE —You are doing two tenders a week for $600 million at the moment, aren’t you?
Mr Hyden —That is correct.
Senator JOYCE —When do you expect that facility to be fully drawn, $200 billion?
Mr Hyden —I think that would take us several years, so probably about 2012 or 2013, four or five years time.
Senator JOYCE —So 2012, 2013 is when you expect the $200 billion to be fully drawn?
Mr Hyden —That is based «on» the projections in UEFO «of» the budget outcomes, that is the underlying cash balance. Now, those figures are projections rather than forecasts, but they are a matter for Treasury and I am just looking at what are the funding consequences for bond issue «of» meeting those sorts «of» figures.
Senator JOYCE —The government also mentions that there will be, I think, $125 million deficit in revenues; will that have to be funded by bonds?
Mr Hyden —The underlying cash balance reflects the combination «of» revenue and expenditure decisions.
Senator JOYCE —The underlying cash balance, does that take into account other items such as HECS debts and Future Fund and other issues such as that—are there any netting-off effects in your underlying cash balance?
Mr Hyden —There are some additional items that have to be added or subtracted to get to the actual borrowing requirement «of» the government or funding requirement, but they are relatively small, so I think the underlying cash balance gives a pretty good indication—
Senator JOYCE —What is our total debt or total bonds that are issued at the moment, Mr Hyden?
Mr Hyden —We have some $55 or $56 billion «of» Treasury bonds and $6 billion «of» index bonds, so that is $61½ billion face value.
Senator JOYCE —So about $60-$61 billion at the moment.
Mr Hyden —That is correct.
Senator JOYCE —You say that we will be fully drawn «on» expectations «of» 2012-2013 for the $200 billion. If we were to reach $200 billion before that, that would be an increase in the trajectory, an increase in your expectations «of» how quickly we were arcing down to a fully drawn position «on» our $200 billion.
Mr Hyden —As I said, the expectations are based «on» the forecast in UEFO, so my figures were based «on» that.
Senator JOYCE —So if there was a requirement for a substantial call «on» «funds» through such things as an infrastructure package, that is actually not in UEFO at the moment, is it?
Mr Hyden —I am not sure «on» that, Senator.
Senator JOYCE —So if there was, let us say, a $70 billion infrastructure package in the pipeline, that is not in UEFO; you would actually have to go out and reassess your peak debt position?
Mr Hyden —I think all I can say is that the borrowing figures I have given you are based «on» what is in UEFO; it is really I think for Treasury to say what is in UEFO and what is not.
Senator JOYCE —Treasury have also told me yesterday that we do not have the capacity to repay the interest so we will be capitalising it, and for that you will have to be purchasing bonds as well, won’t you?
Mr Hyden —The interest cost «of» the debt is part «of» the underlying cash balance, so that is taken into account in these figures.
Senator JOYCE —What is the cost «of» the instrument? What is the face value interest rate «on» your instrument at the moment, Mr Hyden?
Mr Hyden —We have various coupon rates because different bonds are issued at different rates.
Senator JOYCE —Give me an example: are your coupon rates increasing in yield or decreasing?
Mr Hyden —«On» new issues they have been tending to decrease because rates have fallen over recent years.
Senator JOYCE —What is the latest one’s coupon yield?
Mr Bath —I am not sure «of» the exact coupon «on» the most recent one we issued but essentially once we start a new bond line, the coupon is set for the life «of» that bond. So as we issue more stock into that line, that coupon would still be the same.
Senator JOYCE —The price «of» the bond changes.
Mr Bath —That is true.
Senator JOYCE —What was the implicit yield «on» the last?
Mr Bath —So the market yield?
Senator JOYCE —Yes.
Mr Bath —The market yields range from about three per cent «on» the very shortest bonds, although we tend not to issue into them, up to about 4¼ to 4½ per cent for our longest bonds.
CHAIR —Senator Joyce, Senator Bushby has questions.
Senator JOYCE —This is my last one. Four and a quarter to 4½; what is the implicit yield «on» the US bonds at the moment?
Mr Bath —At the moment I am not sure where the spread is. It is a lot lower than that. I could not tell you off the top «of» my head where US Treasury bond yields are at the moment.
Senator JOYCE —This is definitely my final question. If US yields go up, you would expect Australian yields to have to go up to be able to move those bonds?
Mr Bath —Well, there is a fair margin in there already. It is historically reasonably wide, so I am not sure that you would need to see an additional widening «of» that, or you would not necessary need to see a maintenance «of» that spread for us to be able to attract demand.
Senator JOYCE —So you are saying that will not happen.
Mr Bath —I am not saying it necessarily will not happen; it may. I cannot be definitive «on» it but it would not have to happen.