The federal government's funding agency will issue only two new bonds in 2012-13 and slash its annual net bond issuance to just $9 billion from $44 billion this current year.

The Australian Office of Financial Management (AOFM), which manages the government's debt, said today it will continue to hold bi-weekly bond tenders of $500 million to $1 billion in the coming fiscal year starting July.

A new bond line maturing in 2024 will be introduced before October to support the 10-year futures bond contract, while the yield curve will be extended with a new 15-year bond later in the financial year, it said.

Issuance of indexed bonds is expected to remain stable at $2 billion. The AOFM said it doesn't plan to introduce a new line.

Indexed bonds in the current financial year is forecast to amount to a total of $2.1 billion to $2.2 billion after including the sale of a September 2020 and February 2020 lines in May and June.

The funding agency said it plans to keep at least $10 billion of Treasury Notes on issue at all times to maintain a liquid market.

Gross Treasury bond issuance is expected to amount to $35 billion for the new fiscal year and after accounting for maturities, this represents net issuance of $9 billion.

This compared with $44 billion in net debt expected in the current fiscal year ending June. So far, just a little over $50 billion of bonds have been issued, with a gross total of $58 billion expected by end-June.

On Tuesday, the Gillard government delivered a much-promised surplus budget in the year to June 2013, thanks largely to cuts in spending on defence and foreign aid.

But such a fiscal contraction is likely to drag on economic growth and probably raise the prospects of more interest rate cuts.

This is likely to propel Australian government bond prices higher. They have been stellar-performers of late, scaling record highs.

Demand from offshore investors, who hold around 75 per cent of Australia's $235 billion debt on issue, has been extremely strong as the nation is one of just eight countries with a stable triple-A credit rating from all three major ratings agencies.

The 10-year government cash bond yield fell as low as 3.36 per cent on Tuesday, reaching levels not seen since the 1950s.

And with less government bonds available, yields are set to decline further, with some analysts predicting levels below 3 per cent.

Reuters