Today I am giving a Direction to the Australian Office of Financial Management (AOFM) to increase the issuance of Commonwealth Government securities by up to a further $5 billion, to $60 billion.
This decision continues the Government's commitment to ensure the effective operation of Australia's financial markets.
In May 2008, I announced that the Government would add around $5 billion to the stock of Commonwealth Government Securities (CGS) on issue, and monitor market conditions to determine whether further issuance is required. To date, over $4 billion of this additional issuance has been undertaken.
This issuance has been undertaken in response to market demand for Australian Government Treasury Bonds. There has been strong demand for Australian Government Treasury Bonds in the wake of the global financial crisis. The additional issuance provided so far has assisted conditions in the Treasury Bond market, allowing it and the Treasury Bond futures market to continue to operate in an efficient and effective manner.
There continues to be strong demand for Treasury Bonds and further issuance is likely to be necessary over coming months to maintain the liquidity and efficiency of the Treasury Bond market.
Because they are risk-free, Australian Government Treasury Bonds are the benchmark used by participants in Australia's financial markets to set interest rates beyond the short end of the yield curve, including in the bond futures market. The Australian Government is committed to ensuring that its bonds can play this role effectively. 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.
The new issuance will increase the size of current bond lines and will add to the existing issuance program for 2008-09. The additional issuance will continue to be in those bond lines that are in shortest supply in the market.
The proceeds of the increased bond issuance will continue to be invested by the AOFM in financial assets which best offset the cost and risk of the additional issuance. This includes bonds issued by state and territory governments. As a result, the increase in borrowings is not expected to involve any net cost to Government.
The Government will continue to monitor market conditions closely to determine whether further issuance is required. The Government retains the flexibility to announce further increases in the issuance of CGS, should further increases be necessary to maintain liquidity in the Treasury Bond market.