JobKeeper blunder may have forced up debt costs by $180m

Treasury's overestimation of the cost of the JobKeeper program may have cost the government roughly $180 million in higher interest on the $65.6 billion it raised in the past two months.

An analysis of the bonds raised by the federal government's debt manager shows that before Friday, the government was paying at least three basis points more for debt than it would have if that debt was borrowed after Treasury announced the JobKeeper program would be $60 billion lower than originally forecast.

As the bond market started to factor in the lower cost of JobKeeper and a likely lower supply of new government bonds, the prices rose and the yield, or cost of borrowing, dropped.

"We estimate that the higher cost was probably about three basis points," ANZ head of economics David Plank said. "But we think it's a bit of an unfair way to think about this because the three basis points is smaller than the intraday range that we frequently see for bonds."

While the Reserve Bank cut interest rates and bought bonds to pin the three-year rate at 0.25 per cent, longer-term bond rates have remained elevated.

The relatively high long-term Australian bond rates relative to both short-term bond rates and long-term bond rates in other major bond markets, had been attributed to an expected $250 billion ramp-up in the supply of government bonds.

The Australian Office of Financial Management wasted no time in getting ahead of the enormous task of raising them.

Since March 30, it has sold more than $65 billion of bonds via auctions and two record-breaking syndicated debt sales. The average maturity of the bonds sold since then is more than seven years.

Supply dynamics 'overrated'

Other bond market participants who conceded there could now be a cheaper price for that debt said the expected supply of bonds was not a major factor in yield.

Pendal head of Australian bonds Timothy Hext said: "The supply dynamics of AAA rated bonds is vastly overrated when it comes to determining the yield."

In fact, the extent to which an increase in bond supply and a decrease in credit worthiness influence borrowing costs is vexed.

Historically, major governments have been able to raise debt without a premium even if they have suffered credit rating downgrades.

BetaShares portfolio manager and former Reserve Bank dealer Chamath De Silva said the aggregate amount of interest rate risk was more of a factor in influencing yields over the short term than the nominal volume of bonds sold.

He said this was because bond dealers had limited appetite to take on interest rate risk to support bond issuance, creating short-term pressures that tended to resolve themselves over the medium term.

"The steepening of yield curves are not reflecting growth and inflation – they are a function of supply," Mr De Silva said.

Mr De Silva said the JobKeeper error was large in magnitude, but economic conditions might not allow the government to bank the $60 billion.

"Will the private sector spend or do we see deleveraging behaviour? In which case, the government may have to maintain its current pace of issuance."