Buy our bonds: Treasury charts show borrowing to fall to $75bn

The Australian 12:00am December 20, 2017

David Uren

Treasury has launched its marketing pitch for the government’s debt, highlighting the fall in its borrowing requirement as well as the strengths of the Australian economy.

Treasury’s financing arm, the Australian Office of Financial Management, still has another $32 billion in bond issues to raise this year but has cut total borrowing needs for this year to $74bn from $103bn last year. Excluding the rolling over of maturing debt, the net borrowing requirement has dropped 65 per cent to $28bn.

The AOFM yesterday released a set of charts for investors in Australian government bonds, setting out the reasons they are attractive.

It shows that the narrowing deficit will soon allow inroads to be made on the net debt, which it says will peak at 19.2 per cent of GDP next year before falling back to 17.2 per cent by 2020-21.

ANZ senior rates strategist Martin Whetton says the AOFM will find a receptive audience.

“It’s a broadly good story,” he said. “The most important message is that the pressure is off as a borrower, because they’ve got a falling borrowing task and it should fall again over the next couple of years.”

Although the share of the government bond market held by foreign investors has dropped from its peak of about 80 per cent five years ago, they still hold about 55 per cent of the $517bn in bonds on issue. The AOFM highlights the continuing support from Japanese investors, frequently the largest buyers of government bonds, but also notes that Australian banks have increased their market share to 20 per cent.

Although the difference between the interest yield on Australian and US government bonds has almost disappeared for the first time in 16 years, which might have been expected to reduce demand, the AOFM shows that open bond futures contracts have risen to a record $110bn.

The AOFM charts show the strength of the economy, with rising business investment and very strong employment growth.

Export revenue from energy and other resource commodities is expected to remain almost at record high levels in the next four years. To balance investor concerns that Australia is simply a bet on the Chinese economy, the AOFM notes that services account for 76.5 per cent of the economy, compared with 6.4 per cent for mining.

The housing sector is a widespread concern among global investors. The AOFM includes charts showing the strong growth in building approvals and the falling trend for housing price growth.

It indicates that Australia’s population growth is the highest among the advanced countries at about 1.6 per cent, compared with 1.4 per cent in Germany and less than 1.2 per cent in most other countries.

Although household consumption is much lower than before the financial crisis, the AOFM includes a chart showing wage growth, including total wages and superannuation contributions, picking up to about 3 per cent.

Mr Whetton said the AOFM’s chart pack was designed to answer the issues of major investors, including foreign central banks and sovereign wealth funds.