Plan to wipe out nation’s net debt

The Morrison government has committed to maintaining a bond market at the same time as paying down billions in debt.

The federal government has pledged to maintain a “well functioning” market for Treasury-issued bonds, despite an 11-year plan to eliminate the nation’s net debt.

The 2019 budget papers outlined a schedule for the government to reduce net debt from a 2018-19 peak of 19.2 per cent of gross domestic product to zero by 2029-30. Last year the interest paid on federal government debt was $18 billion.

“This is money that could have built 500 schools or a world-class hospital in each state and territory,” Treasurer Josh Frydenberg said last night.

The blueprint to cut debt raised questions, though, about the nation’s government bond market and whether the decision would impede investors’ allocation to the investment class.

A shrinking government bond market has significant implications for banks, which are required to hold the liquid assets as part of rules designed to keep their balance sheets strong. A less liquid market also has the potential to make the pricing of interest rates more volatile.

But the government last night committed to the bond market being maintained with enough volume to keep it liquid.

“At times when AGS (Australian Government Securities) issuance is not required to finance the government’s activities, successive governments have continued to issue AGS for policy purposes such as to maintain a liquid AGS market,” the budget papers said.

“In particular, the government will focus on ensuring a market of sufficient size to maintain liquidity across the longer yield curve and to support the Treasury Bond ­futures market and other important benchmarks.

“A well functioning and liquid AGS market also supports the development of state government and corporate bond markets by providing a risk-free benchmark.”

In 2019-20 the end of year face value of AGS on issue subject to the Treasurer’s direction is expected to be $560bn, compared with $558bn at the mid-year economic review, according to the budget papers. The face value of AGS on issue is expected to reach about $569bn in 2022-23.

Market participants will however want to get a read on how the government will manage new issuance to keep the bond market vibrant. External macroeconomic conditions and expectations of a cooling global economy are also key factors for bond and fixed ­income markets.

The Australian Office of Financial Management (AOFM) is responsible for issuing government bonds and managing the government’s financing activities. The AOFM issues three types of securities including Treasury bonds, Treasury notes, and Treasury indexed bonds. Treasury bonds accounted for the largest proportion of issuance as at March 22, the budget papers showed.