Among the budget papers were a couple of interesting ideas for investors interested in a bit of fixed interest income.
The federal government plans to raise $2.7 billion from private investors to finance the NBN (national broadband network) in the coming financial year, and that includes selling the idea to households.
The budget papers say the government plans to investment $3.1 billion into the network in 2011-12, and is looking for $2.7 billion of this to come from will come from issuing "Aussie Infrastructure Bonds" to private investors.
Big investors such as super funds and listed investment companies, plus insurers and some banks are likely to be the main buyers of the bonds, but the budget suggest that retail investors will a chance to invest in taxpayer-owned NBN Co.
Households cannot currently purchase government bonds, but the government is trying to develop the market to provide businesses with an alternative to borrowing from banks.
As well as the $3.1 billion over the coming year, the budget papers said the government will invest $18.2 billion into the NBN from 2011-12 and 2014-15.
Over the life of the project, the Federal Government says it will contribute $27.5 billion in taxpayer funds, while the NBN Co plans to borrow the rest on debt markets.
There was a separate provision in the budget to spend more than $11 million via the Australian Office of Financial Management to implement the trading of Commonwealth Government Securities (CGS) on a retail exchange, including the procurement of a securities exchange and stock registry facilities.
"Trading CGS will assist in the development of a deep and liquid corporate bond market, which provides Australian businesses with an alternative funding option to borrowing from the major banks.
"Further information can be found in the Competitive and Sustainable Banking package, released on 12 December 2010," the government said.
But we have heard these ideas before, so instead of leaping to conclusions, let’s see the ideas fleshed out and given some structure.
It’s a good idea though.
There is also confirmation in the budget that the Government is thinking of leaving the amount of government bonds on issue at the current level of around $190 billion (and perhaps a bit more).
Not because it doesn’t want to pay off the deficit (it is) or cut debt, but because leaving that amount of government securities on issue will help insurers and banks, and the Reserve Bank and APRA manage the liquidity needs of the financial sector under new bank rules due to start in around five years.
"To maintain a liquid and efficient bond market that supports the three- and ten-year futures market and the requirements of the new global bank liquidity standards, the panel agreed that the CGS market should be maintained around its current size — that is, around 12 to 14 per cent of GDP over time," the budget documents said.
The new global bank regulations will boost demand for the AAA-rated government bonds among Australian banks, a move that will have "important" implications for liquidity in the government bond market.
The government has consulted a panel of key financial regulators as well as state government-based bond agencies on the outlook for the bond market.
The face value of the total stock of Commonwealth Government Securities on issue in June 2011 is expected to be $192 billion. Net debt is expected to peak at 7.2 per cent of GDP next financial year.
Government says it has not made a final decision on the size of the bond market it said it will continue to monitor developments and consider the advice of the panel, "to ensure the market remains of a sufficient size to support these objectives as the budget returns to surplus".
‘The (global financial) crisis affirmed the value in maintaining a CGS market of sufficient size to support the long-term stability of the financial markets and to ensure the Government is well placed, in a practical sense, to respond to sudden events with large fiscal impacts," the budget documents said.
Doing this would see banks using bonds rather than securitised mortgages as their primary liquidity holdings under the new Basel bank rules.
