Monday, 26 March 2012

Mr Hockey Proposes 30 year Government Bonds

Shadow Treasurer, Joe Hockey, has indicated that in Government, the Coalition would consider issuing 30 year government bonds
  • “to create a benchmark for in particular infrastructure investment”.
This objective sits oddly with the Coalition’s opposite objective, articulated so very well by Shadow Ministers Andrew Robb and Barnaby Joyce – that a Coalition Government would pay off debt.

According to Mr Robb, the Shadow Minister for Finance, Deregulation and Debt Reduction (my emphasis):
  • The top priority for a Coalition government would be slashing debt.”
Mr Robb added:
  • the government should be paying down debt.”
Mr Joyce, the Shadow Minister for Regional De elopement, Local Government and Water recently said:
  • we should be paying our debt down not blowing it out through the roof.”
So what it is?  Will the Coalition “pay down” and “slash” debt, or will it issue 30 year government bonds to lock in Government debt levels out until the middle of the century?

There are also questions for Mr Hockey about what the Coalition, in Government, would do with the money it raises by issuing bonds for 30 years?  Will it use the money for its own infrastructure requirements?  Will it borrow for 30 years to fund what are currently unfunded promises on tax and spending?

Mr Hockey says a 30 year bond would be a "benchmark".  This implies, but is by no means certain, that a 30 year government bond would be a market indicator that would allow the corporate sector to issue bonds of similar duration.  In other words, it would be a pricing benchmark for other issuers of bonds.  This is odd given how under-developed the current corporate bond market is in Australia, even out to 10 years.  I can't imagine too many corporate issuers of bonds wanting to go out 30 years even with a government bond to benchmark pricing.

In issuing bonds out to 30 years, would Mr Hockey propose to reduce the amount outstanding in the shorter dated bond lines?  If so, does he have any concerns about strangling liquidity in these other lines?  If not, does that mean that debt would actually increase?

It will be interesting to see what, in the end, the Coalition comes up with in this space.  As it stands, it is very confusing and not the stuff that will calm markets.

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