Australia's A$500 billion debt pile to test bond buyer appetite

[SYDNEY] Australia's debt pile could increase at a faster pace next fiscal year as the government struggles to rein in its budget deficit, testing the appetite of global investors for the country's bonds.

The amount of federal government securities on issue is set to increase by up to A$73 billion (S$74 billion) in the next 12 months to as much as A$499.5 billion, according to Bloomberg calculations based on government budget forecasts.

That compares with an increase this year of up to A$58.8 billion, calculations show. Gross issuance, which takes into account the refinancing of existing notes, could also rise.

While Treasurer Scott Morrison has vowed the government will live "within its means" and projected the budget will return to balance within five years, net debt as a proportion of gross domestic product is set to blow out to 19.2 per cent by June 2018.

The likely increase in bond issuance comes as buying by offshore investors has failed to keep pace with the market's expansion, taking their holdings down to 63.8 per cent as of December.

"You'd assume that the domestic market is probably going to have to absorb a greater share of government bond sales given the decline in foreign ownership of the market," said Martin Whetton, an interest-rate strategist at Australia & New Zealand Banking Group Ltd in Sydney.

The Australian Office of Financial Management will require an "aggressive issuance campaign" not only for 2016-17, but also for the rest of the current financial year, Commonwealth Bank of Australia analysts led by Adam Donaldson said in a note to clients after the budget.

As one of the few nations with an unblemished AAA credit rating, Australia's debt has been lapped up by international buyers in recent years, while bank liquidity rules and slowing issuance by state governments have bolstered demand domestically.

The low level of yields on offer in most other major developed markets has also shored up demand.

Yet with a A$37.1 billion underlying cash deficit to finance in the next 12 months, and a series of shortfalls in the following three years, the government needs bond investors to keep buying.

The total amount of securities on issue has expanded more than sevenfold since before the 2008 financial crisis. Even with the path back to budget balance that Mr Morrison laid out Tuesday, the debt pile is poised to reach A$640 billion by 2026-27.

The amount of federal debt securities outstanding is projected to be between A$498.5 billion and A$499.5 billion by June 30, 2017, some A$71 billion to A$73 billion higher than a year earlier, based on the budget documents.

With A$21.1 billion of bonds maturing in 2016-17, that means gross issuance of up to A$94.1 billion in the coming 12-month period, according to Bloomberg calculations.

Back in December, the Australian Office of Financial Management had anticipated bond issuance for this year of A$90.5 billion, although the expected size of the gross debt pile at the end of June has shrunk by A$2 billion since then, according to the Treasurer's latest fiscal plans.

The CBA analysts also noted that with the AOFM facing an A$18.9 billion bond maturity in July 2017, the funding arm may choose to get ahead of that refinancing need and issue an additional A$6 billion of securities in the upcoming 12-month period.

"While issuance is set to increase, the market should be able to absorb this slightly higher supply," said Andrew Ticehurst, a Sydney-based interest-rate strategist at Nomura Holdings Inc. "There's continuing interest from abroad in the Aussie dollar market."

BLOOMBERG