Investors continued to rush Australian government bonds in the wake of last night's budget, sending Canberra's borrowing costs to a record low.
Debt market pundits welcomed the Gillard Government sticking to a commitment to keep a large stock of bonds on issue, even as its need to borrow fresh funds falls away as it returns to a budget surplus.
Canberra is planning to sell $11 billion in net new Commonwealth government bonds over the 2013 financial year, a sharp slowdown from the pace of overall government issues over recent years.
Treasury bond issuance in financial 2013 is expected to be around $35 billion. But after accounting for maturities of $26 billion this represents net issuance of $9 billion, the Australian Office of Financial Management said this morning.
In addition, the government plans to issue $2 billion of Treasury Indexed Bonds in financial 2013, that is bond where interest is linked to inflation, the AOFM said.
The total stock of Commonwealth Government bonds on issue is expected to be $235 billion by June 2012, but with the new issuance this will rise to $246 billion.
Even as stresses swept through Europe's credit markets overnight, Australian 10-year bond yields fell to record lows. They were last quoted at $120.43 each, implying a yield of 3.36 per cent, down five basis points overnight, to levels not seen since the 1950s.
Australia's net debt is expected to peak around 9.6 per cent of GDP before falling towards 7.3 per cent over the next three years.
"If anything Australia could run a larger deficit than what is being signalled by AOFM issuance plans and suffer no ratings consequences or lose market confidence," said Societe Generale interest rate strategist Christian Carrillo.
"After this budget Australian bonds are likely to continue enjoying a 'safe haven' status in international markets," Mr Carrillo said. Australia is one of just eight of countries in the world to have a 'AAA' credit rating, underpinned by its low levels of debt. Australian government bonds have been snapped up by offshore investors in the past year as they look to park funds in the relative safety of the Australian economy.
The government said it plans to keep the Australian government bond market at between 14 per cent to 16 per cent of GDP.
The Government outlined plans to increase its debt ceiling by $50 billion to $300 billion as part of efforts to provide vital liquidity to the Commonwealth government bond market, it said the move was crucial to supporting broader activity across futures and debt markets.
ejohnston@fairfaxmedia.com.au
