Australian Office of Financial Management The Commonwealth Government Securities Market Michael...

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