Buying Back Government Bonds to Save Taxpayers Money

Strategic Insights -

As the bond market experiences turmoil, offering a cheap opportunity to buy back government debt, economists and financial commentators agree that there is no objective reason for long-term bond rates to increase. Despite this, financial market operators follow short-term market sentiment, driven by greed and fear rather than rationality. The Reserve Bank, with its deep pockets, is the only entity capable of turning the tide in the bond market.

Key Takeaways:

  • The Government can buy back its own debt at a discount of up to 22% if it can re-purchase bonds issued three months ago at the current market rate of 9.5%.
  • The Reserve Bank can use its power to hold down short-term interest rates by injecting money into the income stream of former bond-holders, who will then want to earn a return on their funds.
  • In the current economic climate, the only place for former bond-holders to park their money is in short-term Government securities.
  • The injection of money into short-term Government securities from the cashed-up former bond-holders is the means by which short-term rates are held down.
  • The only operator in the market with sufficient deep pockets to turn the tide is the Reserve Bank, operating on behalf of the Commonwealth Government.
  • The bond market is driven by a herd mentality, with bond dealers unable to run against the tide for more than a few minutes.
  • The Reserve Bank's leadership and ability to demonstrate will and capacity to reverse the direction of the bond market are crucial in turning the tide.

Statistics:

  • The 10-year bond rate has increased from 7% to 9.5% over the past three months, resulting in a capital loss of 22% for bond holders.
  • The value of every 10-year bond with a face value of $100 has decreased to $78, representing a loss of $22.
  • The Government can borrow on the short-term market at a rate of 5.5% to finance the debt repurchase.
  • Interest rates in Australia, adjusted for inflation and exchange risk, are higher than those overseas.
  • The Australian dollar has firmied in the short term due to the rise in interest rates.

Sources:

  • The Australian (publication date not specified)
  • Keynes, J.M. (no publication date specified)
  • Reserve Bank of Australia (no publication date specified)
  • Commonwealth Government of Australia (no publication date specified)