The Rudd government will pass laws to allow the issuance of up to $25 billion of government bonds to maintain market liquidity.
At this stage, the government plans to issue only $5 billion worth of commonwealth government securities (CGS) during 2008-09, federal Treasurer Wayne Swan says.
The government has announced changes to securities lending through its bond issuance agent – the Australian Office of Financial Management (AOFM) – and is making state government bonds eligible for exemption from interest withholding tax.
“The existence of an active and efficient bond market alongside the banking system strengthens the robustness of Australia’s financial system and reduces its vulnerability to adverse shocks,” Mr Swan said in a statement.
“To maintain the important benchmarking role played by government bonds and ensure that the government has the flexibility it needs to maintain liquidity in the bond spot and futures market, we will provide legislative authority for an increase in future CGS issuance of up to $25 billion.”
There are about $50 billion worth of CGS currently on issue.
“The government will add around $5 billion to issuance during 2008-09 and monitor market conditions to determine whether further issuance is required,” the treasurer said.
Mr Swan also announced changes to the operation of the securities lending facility by the AOFM.
This facility supports the CGS market by allowing market participants to access bonds that are temporarily in short supply and helps smooth the operation of the market.
Under the changed arrangements, the facility will be permitted to accept a wider range of assets as collateral.
“The change will allow the AOFM to accept similar securities to those accepted as collateral by the Reserve Bank of Australia (RBA) in its market operations,” Mr Swan said.
Among the current list of securities acceptable for the RBA’s market operations are CGS, state bonds, AAA-rated securities issued by certain supranational and foreign government agencies, bills, and certain AAA-rated residential mortgage-backed securities.
Bonds issued by state governments will also be eligible for exemption from interest withholding tax.
“This change is expected to improve depth and liquidity in state government bond markets and improve price discovery,” he said.
“A better functioning state bond market will add to the attractiveness of these bonds, and allow them to make a greater contribution to financial market stability, while resulting in only a small reduction in revenue received by the Australian government.
“These initiatives are part of a package to strengthen financial markets.”