The liquidation of assets that is now being forced on the fund management industry is no doubt the driving force behind the pricing of semi-government bonds (bonds issued by the state governments), with yields moving above swap rates last week in the secondary market. These bonds normally trade around 30 basis points below swap rates, not over swap rates.The funds are distressed sellers and there are no buyers. Maybe this is why the NSW government registered to sell up to ¥300 billion of bonds in the Samurai market during the week - a precautionary move in case cost effective funding cannot be raised at home?(We note that the NSW government has up to two years to sell the bonds under the registration and that it made a similar registration in 2006 but did not sell any bonds.)This may also be the reason the state governments expressed concern about having to compete against Commonwealth government guaranteed banks for funds, going forward.If the state governments find that they are struggling to raise term debt, where is the funding going to come from for the infrastructure spending that is intended to buoy the economy?