Annual Report 2001-2002
|Letter of Transmission (not available as HTML)||353kB|
|Part 1: Overview||130kB|
|Part 2: Report on performance||112kB|
|Part 3: Debt management environment||234kB|
|Part 4: Key operational issues||1130kB|
|Part 5: Statistical information||1527kB|
|Part 6: Management and accountability||1167kB|
|Part 7: Financial statements||391kB|
|Glossary and acronyms||35kB|
This is the third Annual Report of the Australian Office of Financial Management (AOFM) which was established from 1 July 1999 as a prescribed agency within the Treasury portfolio under the Financial Management and Accountability Act 1997. The AOFM assumed responsibility for the Commonwealth's debt management activities, which were previously undertaken within the Department of the Treasury.
In addition to meeting the annual reporting requirements established by Parliament, the report provides information on the Commonwealth's debt management operations for 2001-02, including the debt management environment, market initiatives and statistical information.
A copy of this document can be located on the AOFM web site at: (http://www.aofm.gov.au/publications/reports).
Other sources of information
Information on Commonwealth debt management for previous years is contained in previous Annual Reports and previous annual Commonwealth Debt Management reports. These reports are available on the AOFM web site. Also on that web site are monthly data series on movements in Commonwealth Government securities outstanding, Commonwealth holdings of Commonwealth Government securities and benchmark Treasury Fixed Coupon Bonds outstanding, and a data series, updated quarterly, on the gross outstanding debt of the Commonwealth Government which is published in accordance with the Special Data Dissemination Standards of the International Monetary Fund. The web site also contains details of the Commonwealth's borrowing program, AOFM media releases, speeches and presentations, the AOFM Online Action Plan and general information concerning the AOFM.
Enquiries regarding this report may be directed to:
Australian Office of Financial Management
PARKES ACT 2600
Telephone (61-2) 6263 1111
Fax (61-2) 6263 1222
Review by the Chief Executive Officer
The defining feature of Commonwealth debt management in recent years has been the substantial reduction in Commonwealth net debt. During 2001-02, the AOFM maintained the strategy adopted in recent years of applying surplus budget proceeds to the orderly reduction of outstanding debt, while maintaining the length and efficiency of the Treasury Fixed Coupon Bond yield curve.
The reduction in Commonwealth net debt has raised questions about the future viability of the Commonwealth Government securities market. The Government acknowledged these concerns in the 2002-03 Budget and is committed to consulting with key stakeholders in reaching a decision on this issue.
Looking forward, the AOFM will continue the debt management strategy of recent years while the Government is considering the issue of the future of the Commonwealth Government securities market.
Financial market initiatives
During 2001-02, the AOFM continued to manage the impact of the reduction in net debt on the Commonwealth Government securities market, maintaining benchmark stocks at a level consistent with preserving market liquidity and pricing efficiency.
The AOFM also pursued measures designed to enhance Commonwealth Government securities market liquidity and efficiency.
Bond conversion tenders
The AOFM successfully conducted its first Treasury Fixed Coupon Bond conversion tender in October 2001; two more conversion tenders followed. These tenders offer investors the opportunity to consolidate their holdings of less liquid stocks into the larger, more actively traded, benchmark stocks. The level of tender participation and positive feedback from investors clearly indicated the initiative's success.
Treasury Note issuance
The AOFM successfully introduced new Treasury Note issuance arrangements during the year. Future issuance now will be limited to fund within-year requirements. The changed arrangements also allow the AOFM to minimise financial asset holdings during periods when the Commonwealth's cash flow is seasonally high.
Treasury Fixed Coupon Bond tenders
In July 2001, the AOFM introduced its commitment to announce a forward schedule for Treasury Fixed Coupon Bond tenders. It nominates tender dates twice yearly, at the beginning of the financial year and then after the release of the Mid-Year Economic and Fiscal Outlook. Whilst the AOFM does not announce the specific volume of each tender in the forward schedule, the new arrangements seek to provide investors with a high degree of certainty on issuance activity.
During the year, the AOFM re-introduced a programme of providing regular updates on its activities to the financial markets. This involves hosting formal presentations to financial market intermediaries, supported by individual meetings with major domestic investors. Presentations were well attended and the AOFM received positive feedback from investors about the benefits of maintaining a regular dialogue. The AOFM's web site now is updated regularly with data on market operations and debt outstandings, providing further information to market participants.
Interest rate benchmark
The AOFM manages interest rate risk by reference to a benchmark portfolio modified duration target with a range of 3 to 3.5.1 Where required, the AOFM uses interest rate swaps to maintain the duration of the debt portfolio within the target range. Until the past couple of years, the AOFM successfully used swaps to meet duration objectives.
However, more recently, maintaining the portfolio in line with the duration target at all times has become increasingly problematic. Within-year cash flows have become more volatile and seasonal, and have a greater impact on overall portfolio duration as the size of the portfolio reduces. Strict adherence to the duration target would require the AOFM to undertake an impractically large number of swaps, with a significant risk of adversely affecting swap market pricing and efficiency.
To remove the impact of intra-year cash flow volatility on debt management decisions, the AOFM is reviewing possible options to revise the portfolio debt management framework.
Foreign currency benchmark
The Commonwealth has maintained a discretionary foreign currency exposure within its debt portfolio for many decades. In the late 1980s, the Commonwealth adopted a policy that included targeting a foreign currency exposure of around 10 to 15 per cent of the portfolio.2
In June 2001, the AOFM completed a review of this policy, which recommended the policy be discontinued. In September 2001, the Treasurer instructed the AOFM to commence a programme for orderly elimination of the foreign currency exposure on a schedule agreed between AOFM, Treasury and the Reserve Bank of Australia, concluding no later than 2008.
Looking ahead, the AOFM plans to continue to introduce initiatives to enhance its capacity to manage and deliver debt portfolio outcomes consistent with the Government's requirements. Major priorities include completing the next stage of the review of the portfolio interest rate benchmark and fully implementing the Quantum treasury system.
Subject to the outcome of the Review of the Commonwealth Government Securities Market, the AOFM will continue the debt management strategy of recent years. It will undertake regular issuance of long-dated Treasury Fixed Coupon Bonds to maintain the length and efficiency of key benchmark maturities. Subject to investor feedback, the AOFM plans other initiatives such as the continued use of conversion tenders to enhance the liquidity of the existing stock of debt.
The AOFM will also provide assistance as appropriate to the Department of the Treasury in the Review of the Commonwealth Government Securities Market.
I would like to take this opportunity to acknowledge the dedication of the AOFM team for its effort and contribution over the past year.
Chief Executive Officer