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TECHNICAL NOTE 1 INCOME ON DEBT
8 These limitations have recently become more pronounced as a result of the global financial crisis, which has seen a dramatic increase in spreads between government and corporate bond yields. This is demonstrated in graph 1.
9 The graph also demonstrates that yields in different currencies have moved differently, with yields on $US-denominated bonds in particular having fallen by more than yields on bonds denominated in other major currencies. As a result, changes in US Treasury bond yields have been a poor proxy for changes in other yields.
10 The new methodology employs government bond yields for calculating accrued income on government bonds and corporate bond yields for calculating accrued income on corporate bonds. The methodology also uses yields specific to the currency of denomination of the bonds.
11 For bonds held as assets by Australian resident investors, the survey of international investment provides the split across currencies of denomination (with the major currencies being Australian dollar, US dollar, pound sterling and Japanese yen). The survey does not provide the split between government and corporate bond holdings, but this is currently estimated from other ABS sources to be 33% government and 67% corporate bonds. The new methodology employs 10 year government bond yields and composite corporate bond yields in each of the major currencies to calculate accrued interest credits.
12 For bonds issued by resident non-government entities, the survey of international investment provides the split across the major currencies of denomination, and a composite corporate bond yield for each currency is used to calculate accrued interest debits. For bonds issued by the Commonwealth and State governments, the previous methodology has been retained, with accrued income debits calculated by applying composite yields on the long term debt currently on issue by the respective governments.
IMPACT ON THE NET INCOME DEFICIT
13 The new methodology has served to increase the level of estimates of both income credits and debits. This is due primarily to corporate yields being greater than government yields for each currency of denomination. Income debits have increased more than income credits, primarily because the level of long term debt liabilities is significantly higher than the level of long term debt assets. Graph 2 shows the impact of the new methodology on income credits, income debits and the net income deficit for the revisions period between the September quarter 2004 and the March quarter 2008.
14 The revised methodology has resulted in an increase in the net income deficit of $1.4 billion for the March quarter 2008, $0.7 billion for the December quarter 2007, $0.6 billion for the September quarter 2007 and $0.4 billion for the June quarter 2007, with smaller increases of between $0.1 and $0.2 billion for the prior quarters.
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