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The yield touched 3.84%, the lowest since September. The Australian dollar bought 92.81 US cents as of 5pm yesterday in Sydney, little changed from a month earlier.

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AUSTRALIAN bonds are generating the strongest demand in three years on speculation the central bank will win room to hold record low interest rates as treasurer Joe Hockey first budget focuses on deficit reduction.

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Australia's funding arm said in December it expects net issuance of bonds due in a year or longer and inflation linked notes to total about A$57bn (38bn) in the year ending June 30, 2014.

Investors are paring expectations for tighter monetary policy on prospects a decline in government spending will prompt the central bank to hold rates.

Benchmark 10 year bond yields fell 28 basis points in the past month to close at 3.87% yesterday in Sydney, the biggest drop among 25 developed sovereign Nike Air Vapormax markets tracked by Bloomberg.

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"There's widespread expectation that tightening of fiscal policy will mean the Reserve Bank will remain sidelined for even longer than they might otherwise, and that's a key factor lending support to the Aussie Nike Vapormax

Australian government notes are set for an annualised 7.5% return, which would be the most since 2011, according to Bank of America Merrill Lynch Index data. Debt due in 10 years or longer led gains, having returned 4.9% since December 31.

"You'd be thinking that with fiscal repair, there'll be fewer bonds being issued going forward," Morriss said.

´╗┐Bond demand soars on interest rate forecast

The equivalent figure for the 12 months through June 2013 was $30.4bn.

A Credit Suisse Group index based on interest rate swaps shows traders expect officials to lift borrowing costs 11 basis points over the next year, matching the least in one and a half months. Diminishing bets for rate increases have driven the extra yield investors demand to hold Australian government debt to the lowest this year relative to US Treasuries.

Australian securities due in a decade yielded 123 basis points more than similar maturity treasuries on April 28, the least since December 31. The South Pacific nation holds the top rating from all three major credit assessors, while the US was stripped of its AAA score by Standard Poor's in 2011.

bond market."

the lender's Sydney based head of market research, while Australia New Zealand Banking Group Ltd sees a range from $30bn to $35bn, said Tony Morriss, the head of interest rate research in Sydney.

CBA predicts net sales of such debt will total $36bn in the coming fiscal year, Donaldson said. National Australia Bank Ltd expects $35bn in net issuance, according to Peter Jolly, Nike Vapormax Black And Grey

"Seeing strong action on the fiscal front provides even greater levels of confidence in Australia," Adam Donaldson, the head of debt research at Commonwealth Bank of Australia, said.

Hockey said on May 2 that the nation will raise the pension age to 70 by 2035 from 65 at present, after the National Commission of Audit included an age increase among recommendations that could save as much as A $70bn a year within a decade. It also recommended selling off rail and postal assets and reductions to family welfare payments.

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"What the budget tightening means is it creates a case for the RBA rate to be lower for longer," NAB's Jolly said in a May 2 phone interview. "If we're going to be punching into fiscal headwinds for the next two or three years, the RBA will need to keep a more accommodative monetary policy stance as an offset."

The government hasn't confirmed or denied if it will impose a deficit levy on higher earners that the opposition has derided as a breach of an election promise not to introduce new taxes. The RBA said in April fiscal consolidation may weigh on public demand and signalled it will keep its cash target at 2.5%.

Under the scenario recommended by the commission, Australia's federal net debt would peak at 15.1% of gross domestic product in 2016 to 17 and subsequently decline to just over 5% of GDP. Without policy changes, the budget would remain in deficit until 2023 to 24 and beyond, with net debt rising to about 17%.

The nation's gross debt was 28.8% of GDP last year, the smallest outside of Estonia among advanced economies, according to IMF data. That compared with 105% for the U and 243% for Japan, according to the IMF.

Investors bid for an average 4.14 times the amount of sovereign debt auctioned from January to April, the strongest start to a year since 2011, data from the Australian Office of Financial Management show. A sale of June 2016 notes on April 4 had a so called bid to cover ratio of 5.79, a level unseen since November 2012.

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on Sunday in a statement that Australians need to share the burden of reducing the country's debt, after an opinion poll found most voters think he's broken a promise on tax. The Adelaide Advertiser reported on April 29 that the government will impose a levy of 1% on income of more than $80,000 a year, without saying where it got the information.

Prime minister Tony Abbott said Nike Vapormax Custom

After data last month showed first quarter consumer prices stayed within the RBA's 2% to 3% average annual inflation target, all 33 economists surveyed by Bloomberg News say RBA policy makers will leave the cash rate unchanged.

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"Australia's in a really sweet spot for risk versus reward," Damien McColough, the head of Australian rates strategy in Sydney at Westpac Banking said. "You get enough returns for very little risk, and I think that will remain the case for some time."

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