Daily Commentary BY THE CURVE TEAM –

Monumental Government Debt Issuance Explained

31st of July, 2020

The CEO of the Australian Office of Financial Management (AOFM) Rob Nicholl provided colour yesterday on the logistics of funding the government stimulus since Covid-19 and their intentions for the financial year.

Covid-19 has meant the burden on government’s has increased drastically. Not only was there decreased tax revenues and decreased tax receipts as economic activity declined and unemployment increased, but the government increased their spending efforts through measures such as JobSeeker, JobKeeper and free child care.

Nicholl’s yesterday said the government’s bond issuance would nearly double in the 2020/21 financial year to $240 billion from $128 billion last financial year. He also explained that funding this debt had been and will continue to be conditional on various factors.

A noteworthy factor Nicholl’s mentioned was the RBA’s 3-year Australian government bond target of 0.25% implemented in March. Nicholl’s said to finance the government’s measures early in the pandemic they needed to issue debt, but with the market dislocation there were many sellers of government debt and bid offer spreads had widened. The RBA’s policy offered buyers for those wishing to sell and tightened bid offer spreads. Without this the task of funding the debt could have been very difficult and potentially expensive.

Nicholl’s also cited

‘[Australia’s] strong sovereign credit rating, attractive yields, transparency in the market (including consistent clear messaging from the RBA), active support from intermediaries, and up-to-date issuance guidance combine to promote investor confidence.’

As being critical to issue debt in such large volumes and over a short period.

Overseas, the drastic impact that Covid-19 is having on the economy is starting to be seen in data. US GDP fell roughly 8.2% in Q2 and Germany’s fell 10.1% over the same period. It gives an indication of the magnitude of the impact Covid-19 is having on the economy. It also shows that harsher lockdown measures lead to a more severe impact on the economy, as Germany imposed harsher lockdowns than the US.

Today we will get an update on credit data in Australia. Last month aggregate credit went backwards for the first time since 2011 so it will be interesting to see if there was a rebound over June.

Josh Stewart

Client Relationship Manager