At $5 billion a week in bond auctions, the government will issue about $250 billion over the next 12 months. The AOFM, however, will also raise additonal funds via syndicated bond sales, in which dealers source investors in capital markets-style transactions.

Bond investors have been trying to determine the extent to which the increase in the supply of government issuance, and a potential loss of the AAA credit rating, will weigh on bond prices, putting upward pressure on yields and borrowing costs.

Nomura analysts estimated that to finance the various economic response packages, the AOFM would have to raise an additional $90 billion by June 30, taking total issuance to $144 billion, and raise an additional $232 billion on the 2020-21 fiscal year. That compares to $55 billion in the 2018-2019 fiscal year.

The presence of the Reserve Bank, which has thus far bought over $30 billion of Commonwealth and state government bonds via its daily quantitative easing purchases since March 20, is expected to keep bond rates in check to some degree.

On Wednesday, the three-year rate fell below the Reserve Bank's 0.25 per cent target set as part of its yield curve control measure, while the 10-year rate fell to below 0.7 per cent, from 0.9 per cent at the start of the week.

But a reduction in the pace of bond purchases by the Reserve Bank on Thursday led to yields on bonds rising.

A new buyer to emerge

On Friday, as the Reserve Bank offered to buy $2 billion of long-term government bonds, the three-year rate traded slightly higher than the 0.25 per cent target while the 10-year rate traded at 0.81 per cent.


ANZ interest rate analysts said the Reserve Bank's willingness to buy government bonds between seven and nine years had helped to reduce long-term bond rates.

However, the gap between the three-year rate and the 10-year rate, at 50 basis points, is still higher than it was in January and February before markets were roiled by the COVID-19 panic.

"We think this reflects concerns about increased supply and suggests the RBA has more work to do," said the ANZ analysts.

While the Reserve Bank's daily purchases of bonds in the secondary market are expected to support the bond market and keep yields in check, another large buyer of Australian Commonwealth and state bonds is expected to emerge.

Australia's banks are required by regulators to own government bonds as part of their liquid asset holdings, which can be sold rapidly to fund deposit withdrawals.

Because of the nation's low debt levels and relative shortage of government bonds, the banks were limited to owing 25 per cent of the government bond market.

But with the expected increase in the government bond market, the banks may be required to own up to 35 per cent of the market.

According to Nomura's Andrew Ticehurst, this increase could account for an additional $157 billion of bonds – a "significant portion of the increased supply".

"Together with the RBA’s yield curve control-based QE buying, under which there is no set cap on the volume of bonds the RBA can purchase, our take is that the coming dramatic rise in bond supply could have little discernible impact on the level of bond yields," Mr Ticehurst said.