Got your bonus? They want it back

We need to talk about bonds. Not the underwear brand, or the British spy, but bonds, financial assets, that little understood but fundamentally important vehicle for government fund-raising.

You need to know about them because pretty soon the Government will be asking you to buy some "Aussie Infrastructure Bonds" to help raise the money needed to make Kevin Rudd's $43 billion broadband dream a reality.

The idea of issuing specially branded government bonds is not new. During World War I, the US issued so-called "Liberty bonds" both as a way to finance the war effort and to boost morale. Posters were designed to appeal to citizens' patriotic instincts, telling them: "If you can't enlist - invest. Defend your country with your dollars." Washington raised $US180 billion this way during World War II. In Australia, we had our own "War Savings Certificates" during both world wars.

Rudd's proposed infrastructure bonds are similar to these war-time offerings. Uncle Kev needs you!

But what are they? Are they a good idea? And most importantly, should you buy any?

Basically all bonds are like IOUs, plus interest. You hand over your cash and, in return, the government (or sometimes a company) promises to pay you back the same dollar amount at a fixed "maturity date", such as April 15, 2012, for a three-year bond issued today.

In the meantime, the government pays you regular, usually twice yearly, "coupon" payments of, say, 5 per cent of your total money. So, if you stump up $100, you get $5 a year. The government gets the use of your money for a fixed period, and you earn a steady, guaranteed income.

As the federal budget sinks deeper and deeper into the red, the Rudd Government has begun raising about $1 billion a week this way through sales of treasury bonds to institutional investors. About 60 per cent are sold to offshore buyers.

Each Wednesday and Friday, Treasury's debt manager, the Australian Office of Financial Management (AOFM), holds tenders for up to $700 million worth of bonds. There's one set to go off today at 10.15am.

So far, it has proved a cheap and efficient way to tap financial markets for money. While several bond tenders in other countries have failed, tenders in Australia have been oversubscribed.

All hunky dory so far. Until, that is, Rudd came along with his new infrastructure bond idea.

From what I gather, these new bonds are at best unnecessary and, at worst, an expensive and cynical political ploy to garner support for the biggest infrastructure gamble in Australia's history. There is no real reason the Government could not just increase its bond sales to institutional investors to raise the extra funds needed - about $8 billion or $9 billion all up. It's just a drop in the ocean compared with the total funding requirement over the next four years which is approaching $200 billion.

By creating a new asset class, the Government will now also need to create some added inducement for people to prefer this new type of investment over ordinary government bonds. That most likely means offering a higher return, making them a more expensive way for the Government to borrow.

The last time we used specially branded bonds was in the late 1970s and early '80s with Australian Savings Bonds, dubbed "Aussie Bonds".

Advertised heavily in newspapers and on TV they proved popular with investors thanks to their high coupon rate and the fact they could be cashed in at a month's notice. Bob Hawke ultimately decided they were an expensive and erratic form of funding and scrapped them in 1987.

Details on what form the new Australian Infrastructure Bonds will take are sketchy. Here's what we know: the bonds will be sold by the AOFM and will be covered by the Government's deposit guarantee. Apart from that, it's anyone's guess. Some say they may be "convertible bonds", so instead of getting your cash back on the maturity date, your money converts to shares in the newly created public-private broadband company. But I doubt this will be attractive to the same small investors who only recently, at the government's urging, bought shares in Telstra, only to watch them halve in value.

I also suspect mums and dads will be confused at mixed Government messages. The same Government has just told them to "spend, spend, spend" to save the economy, and now it's urging them to "save, save, save" with infrastructure bonds. The whole thing smacks of a Hollowmen-style exercise, designed to drum up jingoistic sentiment while the nation's finances plunge even deeper into the red. Just like war bonds, these new Aussie bonds are about giving people "skin in the game" in the Government's broadband adventure.

As Stephen Conroy put it, investors will have "a stake in the country's future" and, presumably, also a stake in getting the Labor Government re-elected to deliver on the project.

But if small investors want to contribute to the Government's efforts to update the broadband infrastructure, there is nothing stopping them now. Any day of the working week, investors can front up to the Reserve Bank's headquarters in Martin Place, or its Canberra office, and purchase Treasury bonds in minimum lots of $1000. Investors can call them whatever they like, perhaps "Kev and Swannie's Building Big Stuff and Fighting the GFC Bonds".

But only about 10 people a week think it makes sense to do that now. Think about that before rushing in to do your new patriotic duty.

Jessica Irvine is the Sydney Morning Herald's economics writer.

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