The Commonwealth Government Securities Market

1
The Commonwealth Government Securities Market

• Michael AllenAustralian Office of Financial
  Management

2
Introduction

• Commonwealth financing task
• AOFMs role
• AOFM funding activities

3
Commonwealth Government Financing Task
4
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.
5
Net Funding Requirement
6
Commonwealth Government Debt
7
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

8
OECD Net Debt
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Fiscal Context

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

10
Global Bond Indices
AUD Share in Decline
Source Salomons WGBI
11
MSCI Sovereign Debt Index
Source Morgan Stanley, Capital International
12
CGL Market Outstandings
Commonwealth
State
Corporate
13

• Role of the
• Australian Office of Financial Management

14
AOFM

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

15
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

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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

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AOFM

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

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AOFM

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

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Debt Management Responsibility

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

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Portfolio Management

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

21
Funding Strategy Objectives

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

22
AOFM Funding Activities
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Debt Maturity Profile
24
Change in Funding Source
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T-Note Funding
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T-Note Funding

• Greater flexibility
• Benchmark lines
• Increase market liquidity
• Benchmark short end curve
• Assist RBAs market operations

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T-Note Market Turnover
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T-Note Liquidity Ratio
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Short Term Debt Profile
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Inflation Linked Funding

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

31
Inflation Linked Funding
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Bond Market Funding

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

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Bond Market Activity
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Bond Market Maturity Profile
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Bond Maturity Profile - June 1988
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Funding Strategy - Background
37
Funding Strategy - Background
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Conclusion

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