Senate Economics Legislation Committee [Part 2], , 3:18:35 to 3:27:52
Examination of high Australian bond yields relative to global peers, interest payment projections, and market expectations for future Reserve Bank monetary policy tightening.
Topics: Government spending, Energy prices
Speakers: Senator Dave Sharma, Anna Hughes, Speaker 24, Speaker 23, Senator Lisa Darmanin, Interjection
Thank you very much. Um I didn't realize that it was tabled and in front of us. So um anyway, we we all have it here, the full statement. So I'm going to go to Senator Sharma.
>> Thanks J. Thanks and good evening. Um can you tell me how much um what are the total government Australian government securities on issue at the moment?
>> Uh 995.9 billion.
>> Okay. And what was the last um issue of 10ear Treasury bonds?
>> The last one
>> what was the weighted average yield for that last 10 year treasury bonds you
>> No. Um actually I'll pass to the deputy CEO to answer that question. Thank you.
>> Hi Kina, deputy CEO. Um we last issued a 10-year tender of a billion dollars of the October 2037 maturity um on the 27th of October. The weighted average yield there was 5.2%. Um coverage ratio was 3.1 times covered.
>> Okay. So 5.2%. And what are that what are the 10ear Treasury bond yields trading at on the secondary market at the moment?
>> Around 5.2%.
>> Around 5.2. Okay. Um how much and how much um I noticed in your opening state you talk about uh the issuance of Tre Treasury bonds over 2026 27 expected to be around 125 billion. Is that new debt or is that include the rollover existing debt?
>> That includes refinancing as well.
>> Okay. >> Yeah. >> Can you just um how much debt do you expect to have to refinance by the end of this calendar year? Have you got the breakdown of those?
>> We do. you off the top of your head.
>> Um, so it's about $79 billion of refinancing. Uh, half of that has already matured in September 2026 and the other half roughly will mature in April 2027.
>> Okay. So, so sorry 79 billion by the end of this final year. Correct. Okay. >> And have you um >> in the budget papers they assume a weighted average cost of borrowing for issuance of treasury bonds at 4.8%. 8%.
That's correct.
>> Which is up from what it was 4.4% at my EO.
>> That's correct.
>> Is your advice to Treasury that they will need to increase that assumption in the upcoming May?
>> We're in the So, we're in the um process of doing the midyear economic update. Uh and uh those u updated yields um the latest yields will be updated in the the next budget release.
>> Okay. But it's going to be higher than 4.8%, isn't it?
>> It is correct. That's correct.
>> Okay. Have you done a calculation of how much that will add to um interest rate payments.
>> That's a better question for for Treasury, but I would note that the budget papers do have some sensitivity analysis that you could um you could refer to if you're looking for a quick answer.
But the general the view without having to quantify it is that that budget estimate will need to be revised upwards
later. >> That is correct.
just looking at Australia's 10year Treasury bond yields, um, I mean, they're higher than Portugal, higher than Italy, higher than Greece, higher than Spain, higher than France, higher than the United States, higher than Canada, higher than Japan, higher than New Zealand. They're some of the highest in the amongst advanced economies in the world.
Why is that? Uh so the reason the my primary reason for that um I guess to start with the year levels um reflect each economy's um policy rate outlook inflation growth and um term premium. So with the RBA actually having a target rate of inflation between 2 to 3% and 2.5 is the mid% um that is actually 50 basis points higher than a lot of the advanced economies. Um and so Certainly since the the GFC we have continued to have um higher rates than most advanced economies and this actually is reflective of our uh stronger economic performance um in regards to sort of European yields. So you talked about um Portugal it's um reflects structurally lower growth and a history of heavy uh central bank buying of bonds um which actually influences um some of the pricing. Uh the other sort of factor that we look at is that Australia has um historically run current account deficits and so that relies um more on foreign um so we have historically relied more on foreign capital which means that investors sometimes require a higher yield uh in economies that um sorry a higher yield than uh economies with more domestic savings. And
>> what about the inflation outlook and
definitely a component of it.
>> What does that do? >> Which way does that tend to push Australian bond yields? If inflation if inflation and the inflation outlook
>> Yes. So
>> is higher in Australia than some of those other economies. What does that do to 10 year Treasury bonds?
>> So in uh the inflation is reflective of of both domestic factors uh as well as uh international factors. And so certainly what we've seen since the Middle East conflict is that those global factors are playing more into yields. Uh and certainly what we've seen is that our increases since February have been smaller than some of those other advanced economies.
>> Our increases in our
>> yields,
>> Treasury bond yields. but the buyers of government debt, treasury bond yields, I mean they also look at which way monetary policy is going, right?
>> They do.
>> I mean are you seeing on the bond market an expectation the Reserve Bank will need to further tighten monetary policy >> Uh see you nodding Mr. We
>> sure Matthew Weeden, head of funding at the AFM. Um so certainly um the market does have indeed have um uh another rate hike priced in for for this uh calendar year. Um it's about one one and a quarter hikes price now priced in for the rest of the year. Um that would take
>> about 30 basis points
>> ish. Yeah.
>> And um and does that feed directly into the Treasury Bond?
>> Yeah. Look, the front end the the front end of the yield curve is anchored by by cash rates, the policy rate. That's true in every economy.
>> Yes.
>> Um so um you know to the extent that um there are expectations and and sorry I should start again front end is an anchored by the RBA. The longerterm bond rates >> the biggest component of a 10-year bond rate would be expectations for the future path of of the cash rate over time. So you know right now the differential is is yeah 4.6 on the cash rate expected to go up to yeah 4.9 you called it circa 5. Um the 10-year bond yield around 5.2. too. So, it's relatively flat in terms at that this point in time.
>> Yeah.
>> Yeah.
>> Yeah. Okay. >> Um, have you got a figure of um what you expect Australian government bonds on issue to be at the end of this financial year? Do you model that or is that only
>> Yes. There's no update to the um the budget number. So, I think the budget number was um it just just over a trillion by the end of this financial
>> Okay. No changes to that. Okay. Um, look, I do have some further questions on the debel review recommendations, but I'm happy to put those on notice in the interest of time and thank you for addressing some of those in your opening statement. Thank you, chair.
>> Thank you very much, Senator Sharma. That concludes our questions with um the AOFM. Thank you so much for coming this >> We'll suspend for a short moment while the uh well, representatives from well, representative from the ACC joins us at We're good. All right, we're going to