22 July 2008
AOFM INVESTMENT ACTIVITY 2008-09
This notice provides details of planned investment activity by the Australian Office of Financial Management (AOFM) on behalf of the Australian Government during the 2008-09 financial year (1 July 2008 to 30 June 2009).
The AOFM currently manages the Government’s daily cash balances and invests surplus funds in term deposits with the Reserve Bank of Australia. It also undertakes investments in short term money market instruments on behalf of the Communications Fund.
On 20 May 2008 the Treasurer announced that the Government would increase its issuance of Treasury Bonds to support the effective operation of Australia’s financial markets and that the proceeds of the additional issuance would be invested by the AOFM.
Legislation to allow the increased issuance and extended investment activities has now come into effect and the Treasurer has issued directions relating to the use of his investment powers. Under these directions:
- Investments of the proceeds of the additional issuance of Treasury Bonds are to be made with the objective of offsetting the debt servicing cost and interest rate risk of the additional issuance. To this end, these investments should aim to provide returns that are commensurate with the debt servicing costs of the additional issuance while adopting a prudent approach to credit and interest rate risks.
- In managing the daily balances in the Official Public Account, priority is to be given to ensuring that the Government is able to meet its financial obligations, as and when they fall due, through prudent management of the volume and tenor of investments. Subject to these cash management requirements, the return on investments is expected to be enhanced beyond that available on Reserve Bank term deposits through investments in short term instruments with low credit risk.
Term Investment Activity
As indicated in AOFM Operational Notice No 3/2008, the AOFM plans to issue around $10.3 billion of Treasury Bonds in 2008-09, of which around $5 billion represents additional issuance to increase the total stock of bonds on issue.
The proceeds of this additional issuance will be invested in Australian dollar denominated debt securities:
- issued by Australian Government guaranteed entities;
- issued or guaranteed by Australian State and Territory governments; and
- issued by AAA rated sovereigns, supranationals and financial institutions.
Securities will be selected that closely match the interest rate risk of the additional Treasury Bond lines to be issued.
Purchases of investments will occur through one of four mechanisms:
- on an outright basis, where the AOFM will contact at least three counterparties for either two-way prices or offers;
- on a switch basis, where the AOFM will contact at least three counterparties for prices to allow the AOFM to switch from one existing investment to another;
- as part of a placement of either new (‘primary’) or existing (‘tap’) Kangaroo bond issues, either on an outright or switch basis; and
- via tenders for the additional issuance into existing Treasury Bond lines conducted on a switch basis.
Of the above mechanisms, (i) and (ii) will be undertaken via the YIELDBROKER DEBTS system and/or telephone, (iii) will be undertaken by telephone and (iv) will be undertaken through the AOFM Tender System which is accessed via the BLOOMBERG PROFESSIONAL® Service.
Money Market Investment Activity
The AOFM will invest some of the Australian Government’s short term cash balances in short term money market investments from time to time in addition to investments in term deposits with the Reserve Bank.
Specifically, the AOFM will invest in A1+ and A1 rated bank accepted bills and certificates of deposit issued by Authorised Deposit-taking Institutions, and A1+ rated asset backed commercial paper.
The AOFM expects to conduct its short term investments on a select tender basis, similar to that undertaken in its management of the Communications Fund.
The Government announced in the 2008-09 Budget that the Communications Fund will be closed and its assets transferred to the Building Australia Fund, which will be managed by the Future Fund Board of Guardians. It also indicated that the Building Australia Fund will be established by January 2009.
AOFM Investment Facility – Conditions of Panel Participation
Investments will be transacted only with members of the AOFM Investment Facility dealing panel and the Reserve Bank of Australia.
The Conditions of Panel Participation in relation to the AOFM Investment Facility have been revised with effect from 23 July 2008.
Publication of Investment Holdings
The AOFM will publish, by the third Thursday of each month, a high level summary of its short and long-term investment holdings at the end of the previous month.