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Australian Office of Financial
Management
The Commonwealth Government Securities
Market
Michael AllenAustralian Office of Financial
Management
Australian Office of Financial
Management
Introduction
Commonwealth financing task
AOFM’s role
AOFM funding activities
Australian Office of Financial
Management
Commonwealth
Government Financing
Task
Australian Office of Financial
Management
Headline Cash Balance*
* Following recent changes in the Australian National Accounts Standards, the underlying and headline cash balance estimates in the chart from 1998-99 onwards include payments by the Commonwealth in respect of accumulated PTE superannuation liabilities.
-10
-5
0
5
10
15
20
25
1995-96Actual
1996-97Actual
1997-98Actual
1998-99Actual
1999-00Actual
2000-01Budget
Esitmate
2000-01MYEFO
2001-02MYEFO
2002-03MYEFO
2003-04MYEFO
$ billion
Australian Office of Financial
Management
Net Funding Requirement
-25
-20
-15
-10
-5
0
5
10
1995-96Actual
1996-97Actual
1997-98Actual
1998-99Actual
1999-00Actual
2000-01Budget
Estimate
2000-01MYEFO
2001-02MYEFO
2002-03MYEFO
2003-04MYEFO
$ billion
Australian Office of Financial
Management
Commonwealth Government Debt
Australian Office of Financial
Management
Fiscal Context
Government set out in Budget– a managed reduction in CGS– not to the full extent of projected reduction in
net debt– maintain liquidity in benchmark lines
Formal market updates
Australian Office of Financial
Management
OECD Net Debt
Australian Office of Financial
Management
Fiscal Context
Australia in the vanguard of OECD countries in addressing a new set of debt management policy issues
– benefits of maintaining sovereign curve
Australian Office of Financial
Management
Global Bond Indices
AUD Share in Decline
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
01/85 04/86 07/87 10/88 01/90 04/91 07/92 10/93 01/95 04/96 07/97 10/98 01/00
Source: Salomons WGBI
Australian Office of Financial
Management
MSCI Sovereign Debt Index
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
Country Share
%
Source: Morgan Stanley, Capital International
Australian Office of Financial
Management
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00
Commonwealth
State
Corporate
CGL Market Outstandings
Australian Office of Financial
Management
Role of the
Australian Office of
Financial Management
Australian Office of Financial
Management
AOFM
AOFM established 1 July 1999
Debt management responsibility
Prudent Sovereign Debt manager
Australian Office of Financial
Management
AOFM
Australia among the leaders in the OECD in pursuing a complementary focus on reform of public sector financial management
– Charter of Budget Honesty
– Accrual budgeting, reporting and accounting
Australian Office of Financial
Management
AOFM
As with any corporate treasury function, sovereign debt management is a business exposed to a variety of financial risks– fiduciary responsibility to taxpayers
critical distinctions between sovereign and corporate
Australian Office of Financial
Management
AOFM
Policy constraints Market liquidity Risk free pricing benchmark Commercial constraints
Australian Office of Financial
Management
AOFM
Risk Management Task–Debt issuance–Financial risk–Credit risk–Operational risk
Commonwealth approach is ahead of OECD practise.
Australian Office of Financial
Management
Debt Management Responsibility
Debt issuance Risk management Cash management General Government interest
calculations Market communication
Australian Office of Financial
Management
Portfolio Management
Risk accountability Passive approach Benchmark portfolio Risk management Performance monitoring
Australian Office of Financial
Management
Funding Strategy Objectives
Sovereign Debt Manager Flexible strategies Investor demand Liquidity premium Market efficiency
Australian Office of Financial
Management
AOFM Funding
Activities
Australian Office of Financial
Management
Debt Maturity Profile
Australian Office of Financial
Management
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Bonds TARBS IndexedLinked
T - Notes International Other
1991
2000
%
Change in Funding Source
Australian Office of Financial
Management
T-Note Funding
-6
-4
-2
0
2
4
6
8
10
12
-6
-4
-2
0
2
4
6
8
10
12
$b
Estimated Commonwealth Cash Balances
September December March June
$b
1999/2000
2001/2002
Australian Office of Financial
Management
T-Note Funding
Greater flexibility– Benchmark lines
Increase market liquidity Benchmark short end curve Assist RBA’s market operations
Australian Office of Financial
Management
T-Note Market Turnover
0
1
2
3
4
5
6
7
8A
ug-9
1
Jan-
92
Jun-
92
Nov
-92
Apr
-93
Sep-
93
Feb-
94
Jul-
94
Dec
-94
May
-95
Oct
-95
Mar
-96
Aug
-96
Jan-
97
Jun-
97
Nov
-97
Apr
-98
Sep-
98
Feb-
99
Jul-
99
Dec
-99
May
-00
Oct
-00
0
2
4
6
8
10
12
14
16
18
20
22
24
Trade T/Over (lhs) Repo T/Over (lhs) Total outstanding (rhs)
Average Weekly T-Note Turnover $ billion $ billion
Australian Office of Financial
Management
T-Note Liquidity RatioLiquidity Ratio
0
0.1
0.2
0.3
0.4
0.5
0.6A
ug-9
1
Jan-
92
Jun-
92
Nov
-92
Apr
-93
Sep-
93
Feb-
94
Jul-
94
Dec
-94
May
-95
Oct
-95
Mar
-96
Aug
-96
Jan-
97
Jun-
97
Nov
-97
Apr
-98
Sep-
98
Feb-
99
Jul-
99
Dec
-99
May
-00
Oct
-00
Australian Office of Financial
Management
Short Term Debt Profile
0
10
20
30
40
50
60
70
80
90
100
0
5
10
15
20
25
30
35
40
45
Treasury Notes and Treasury Bonds < 1.5 years to maturity Total Treasury Notes and Treasury Bonds (LHS) Ratio (RHS)
$ billion per cent
Australian Office of Financial
Management
Inflation Linked Funding
Tender performance Market review $300m program Fixed issuance dates
Australian Office of Financial
Management
Inflation Linked FundingTIBs - at tender margin to secondary market
-15
-10
-5
0
5
10
1525
/08/
1994
27/1
0/19
94
06/0
4/19
95
13/0
7/19
95
16/1
1/19
95
16/0
5/19
96
10/1
0/19
96
20/0
2/19
97
19/0
6/19
97
16/1
0/19
97
22/0
1/19
98
23/0
4/19
98
13/0
8/19
98
19/1
1/19
98
04/0
3/19
99
05/0
8/19
99
23/0
9/19
99
20/0
1/20
00
bps
Australian Office of Financial
Management
Bond Market Funding
Focus on liquidity Target long dated maturities Regular tender program $3.4 b 1999/2000 issuance
Australian Office of Financial
Management
Bond Market Activity
0
20
40
60
80
100
84/5 85/6 86/7 87/8 88/9 89/90 90/1 91/2 92/3 93/4 94/5 95/6 96/7 97/8 98/9
0
1
2
3
4
5
6
7
Bonds Outstanding (LHS) Physicals, excl. Repo's (RHS)
$ billion $ billion
Australian Office of Financial
Management
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-01 Nov-01 Mar-02 Oct-02 Aug-03 Sep-04 Jul-05 Feb-06 Nov-06 Oct-07 Aug-08 Sep-09 Jun-11 May-13
Bond Market Maturity Profile
Australian Office of Financial
Management
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jul-88 Jul-89 Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05
$ M
Bond Maturity Profile - June 1988
Australian Office of Financial
Management
Funding Strategy Objectives
Cost vs Risk
Flexibility CommercialPrice Tension
Benchmark Issuance
Transparency
Funding Strategy - Background
Australian Office of Financial
Management
Primary Market
Curve Efficiency
Curve Efficiency
Secondary Market Liquidity
Liquidity Premium
SubstitutionPrice Tension
Secondary Market
Funding Strategy - Background
Australian Office of Financial
Management
Conclusion
Reduced Commonwealth financing task
Potential for further decline in relative liquidity
AOFM to provide regular updates