Australian Government, the Australian Office of Financial Management

The Commonwealth Government Securities Market

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Michael Allen
Australian Office of Financial Management

The Commonwealth Government Securities Market

Introduction

  • Commonwealth financing task
  • AOFM's role
  • AOFM funding activities

Introduction

Commonwealth Government Financing Task

Commonwealth Government Financing Task

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.

Headline Cash Balance

Net Funding Requirement

Net Funding Requirement

Commonwealth Government Debt

Commonwealth Government Debt

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 update

Fiscal Context

OECD Net Debt

OECD Net Debt

Fiscal Context

  • Australia in the vanguard of OECD countries in addressing a new set of debt management policy issues
    • benefits of maintaining sovereign curve

Fiscal Context

Global Bond Indices

Global Bond Indices

MSCI Sovereign Debt Index

MSCI Sovereign Debt Index

CGL Market Outstandings

CGL Market Outstandings

Role of the Australian Office of Financial Management

Role of the Australian Office of Financial Management

AOFM

  • AOFM established 1 July 1999
  • Debt management responsibility
  • Prudent Sovereign Debt manager

AOFM

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

AOFM

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

AOFM

AOFM

  • Policy constraints
  • Market liquidity
  • Risk free pricing benchmark
  • Commercial constraints

AOFM

AOFM

  • Risk Management Task
    • Debt issuance
    • Financial risk
    • Credit risk
    • Operational risk
  • Commonwealth approach is ahead of OECD practise.

AOFM

Debt Management Responsibility

  • Debt issuance
  • Risk management
  • Cash management
  • General Government interest calculations
  • Market communication

Debt Management Responsibility

Portfolio Management

  • Risk accountability
  • Passive approach
  • Benchmark portfolio
  • Risk management
  • Performance monitoring

Portfolio Management

Funding Strategy Objectives

  • Sovereign Debt Manager
  • Flexible strategies
  • Investor demand
  • Liquidity premium
  • Market efficiency

Funding Strategy Objectives

AOFM Funding Activities

AOFM Funding Activities

Debt Maturity Profile

Debt Maturity Profile

Change in Funding Source

Change in Funding Source

T-Note Funding

T-Note Funding

T-Note Funding

  • Greater flexibility
    • Benchmark lines
  • Increase market liquidity
  • Benchmark short end curve
  • Assist RBA's market operations

T-Note Funding

T-Note Market Turnover

T-Note Market Turnover

T-Note Liquidity Ratio

T-Note Liquidity Ratio

Short Term Debt Profile

Short Term Debt Profile

Inflation Linked Funding

  • Tender performance
  • Market review
  • $300m program
  • Fixed issuance dates

Inflation Linked Funding

Inflation Linked Funding

Inflation Linked Funding

Bond Market Funding

  • Focus on liquidity
  • Target long dated maturities
  • Regular tender program
  • $3.4 b 1999/2000 issuance

Bond Market Funding

Bond Market Activity

Bond Market Activity

Bond Market Maturity Profile

Bond Market Maturity Profile

Bond Maturity Profile - June 1988

Bond Maturity Profile - June 1998

Funding Strategy - Background

Funding Strategy - Background

Funding Strategy - Background

Funding Strategy - Background

Conclusion

  • Reduced Commonwealth financing task
  • Potential for further decline in relative liquidity
  • AOFM to provide regular updates

Conclusion

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