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Appendices

Appendix 1 Public Debt Interest in 1998-99

Nature of Public Debt Interest Outlays

1998-99 PDI Outcome

Charts

Chart 1: PDI Outlays

Chart 2: PDI Outlays as Percent of Total Commonwealth Headline Budget Outlays

Chart 3: PDI Outlays as Percent of GDP

Nature of Public Debt Interest Outlays

Public Debt Interest (PDI) outlays are the costs of servicing the stock of Commonwealth debt.

Interest payments for Treasury Fixed Coupon Bonds and TIBs currently account for around 90 per cent of PDI outlays. In addition to the periodic coupon payments, PDI outlays on bonds also reflect net premiums and discounts on the issue and redemption of these instruments.

The Commonwealth's floating rate instruments, in the form of short-term securities (5, 13 and 26 week Treasury Notes) and longer term TABs, account for most of the remaining 10 per cent of PDI outlays. No periodic interest payments are made on Treasury Notes - the discounts at which they are issued represent their entire PDI cost (incurred at the time the Notes mature). For TABs, floating rate interest is adjusted quarterly based on movements in Bank Bill rates. Interest on foreign currency debt constitutes only a small proportion of PDI outlays.

Payments of interest on the Commonwealth Government security debt of the six State Governments and the NT are treated as Commonwealth outlays. The State and NT component of PDI is falling progressively, following the June 1990 Agreement of the Loan Council that the States would accept responsibility for refinancing maturing debt previously raised on their behalf by the Commonwealth. The last of this debt matures in 2005-06. Reimbursement by the relevant governments of these interest payments, together with interest reimbursements by the ACT on capital advances paid to it in 1988-89 and 1989-90, are recorded as revenue under the heading 'Non-Taxation Revenue', in accordance with international classification conventions (see Statement 6 of Budget Paper No. 1 for further details).

1998-99 PDI Outcome

In 1998-99, total PDI outlays were $7,507.6 million, of which the Commonwealth's share, net of interest earnings on investments of CGS held by the Loan Consolidation and Investment Reserve, amounted to $7,330.8 million. These amounts represented 5.5 per cent and 5.4 per cent respectively of total Commonwealth headline outlays, and 1.3 per cent and 1.2 per cent respectively of GDP. The decrease in total PDI outlays of around 11 per cent in 1998-99 reflected the impact of the reduction in debt in 1998-99 associated with the headline budget surplus for the year.

Charts 1 to 3 show movements in PDI outlays and PDI as a proportion of total Commonwealth headline budget outlays and GDP over the past fifteen years.

Chart 1: PDI Outlays

Chart 2: PDI Outlays as Percent of Total Commonwealth Headline Budget Outlays

Chart 3: PDI Outlays as Percent of GDP

Appendix 2 Liaison With Credit Rating Agencies

During 1998-99, representatives of Standard and Poor's (S&P) and Moody's, the two major credit rating agencies, met with Treasury officers as part of the agencies' regular annual reviews of the Commonwealth of Australia's credit rating.

On 18 May 1999, S&P announced an upgrade of Australia's foreign currency debt rating from AA to AA+, with stable outlook, their second highest rating level. The rating of the domestic currency debt continues at the highest, AAA, level.

In support of their decision, S&P pointed to the government's commitment to fiscal consolidation and debt reduction, which has achieved substantial reductions in general government debt since the mid-1990s; a rapidly declining net public sector external debt burden since the mid-1990s as a result of improving fiscal performance and a successful privatisation program; and continued prudent monetary policy which has established a low inflation environment.

On 5 August 1999, Moody's released a report retaining their credit rating at Aa2, their third highest level, for Australia's foreign currency debt, and the highest level, Aaa, for domestic currency debt.

Moody's report noted that Australia's ratings are well supported by a modern, increasingly flexible economy, a sound macro policy framework and a stable political climate. Particular mention was made of the structural reforms and the resulting shifts in behavior stemming from increased competition contributing to advances in economic efficiency in the last few years with the economy well positioned to weather external shocks.

The outlook on the current rating of foreign currency debt was considered to be stable. Moody's assessment was that an upgrade of their Aa2 rating is constrained by Australia's heavy reliance at times on foreign capital which stems from a structural imbalance between domestic saving and investment. Any potential improvement over the medium term was considered to depend on continued gains in economic efficiency and competitiveness through structural reform, privatisation and deregulation initiatives and a narrowing in the structural imbalance between national savings and investment.

Appendix 3 The Secondary Market for CGS – Movements in Yields

Charts

Chart 1: Australian 3 and 10 Year Benchmark Bond Yields, 1998-99 38

Chart 2: Commonwealth Yield Curves, 1998-99 39

Chart 3: Yields on Benchmark 10 Year Government Bonds, 1998-99 39

Chart 4: Australian/US 10 Year Benchmark Bond Differential, 1998-99 40

Chart 5: Real Yields on August 2020 TIB, 1998-99 40

Chart 6: 13 Week Treasury Note Tender Yields, 1998-99 41

Market conditions in 1998-99 were volatile compared with recent years. As shown in Chart 1, the yield on the 10 year Commonwealth Treasury Fixed Coupon Bond ended the year around 80 basis points above levels at the beginning of 1998-99. The 10 year yield bottomed at 4.71 per cent on 17 December 1998 - the lowest recorded since the Commonwealth began regular bond tenders in 1982. The 10 year bond yield peaked at 6.35 per cent on 11 June 1998. The shorter end of the curve followed a similar pattern to the long end but the movements were less significant, the yield on the 3 year benchmark Treasury Fixed Coupon Bond was around 40 basis points higher at the end of the year than at the beginning of 1998-99.

Chart 1: Australian 3 and 10 Year Benchmark Bond Yields, 1998-99

The sell-off in the Australian bond market in the second half of the financial year was reflected in an upward shift in the Commonwealth yield curve. Yields for longer term debt increased more, resulting in a significantly steeper yield curve at year's end, as shown in Chart 2.

Chart 2: Commonwealth Yield Curves, 1998-99

As shown in Chart 3, Australian, New Zealand and Canadian 10 year bond yields followed a broadly similar pattern to US 10 year bond yields over the course of the year. Australia experienced the largest sell-off over the financial year with Canada having the smallest sell-off.

Chart 3: Yields on Benchmark 10 Year Government Bonds, 1998-99

 

The differential between Australian and US bond yields closed out completely on occasions during the beginning of the financial year as shown in Chart 4.

Chart 4: Australian/US 10 Year Benchmark Bond Differential, 1998-99

Chart 5 depicts the movement in real bond yields over 1998-99, as evidenced by movements in the August 2020 TIB yield, which increased by around 36 basis points. The sell-off was less significant on shorter term TIBs, resulting in the Commonwealth indexed bond yield curve becoming positively sloped.

Chart 5: Real Yields on August 2020 TIB, 1998-99

Chart 6 depicts the yields at tender for 13 week Treasury Notes through 1998-99. The 13 week Treasury Note is regarded as the benchmark Treasury Note in the same way 90 day Bank Bill yields are the benchmark for that market. The 13 week Note yield is representative of the yields on 5 and 26 week Treasury Notes, with the difference between the yields rarely greater than 10 basis points.

Treasury Note yields are heavily influenced by the RBA's target for the overnight cash rate. The RBA announced only one change in its cash rate target in 1998-99, a reduction from 5.0 per cent to 4.75 per cent on 2 December 1998. In anticipation of the lower cash rate target, the 13 week Treasury Note yield began to decline in September and by late November had reached 4.70 per cent, a level it settled around for most of the remainder of 1998-99.

Chart 6: 13 Week Treasury Note Tender Yields, 1998-99

Appendix 4 Commonwealth Government Securities Issued During 1998-99

Tables

Table 1: Treasury Fixed Coupon Bond Tenders

Table 2: Treasury Indexed Bond Tenders

Table 3: Summary of Proceeds of Loans Raised

Table 4: Treasury Notes Issued

Table 5: Swaps Executed by the Commonwealth in 1998-99

Table 1: Treasury Fixed Coupon Bond Tenders

Table 2: Treasury Indexed Bond Tenders

Table 3: Summary of Proceeds of Loans Raised

Table 4: Treasury Notes Issued

Table 4: Treasury Notes Issued — continued

Note: The proceeds relating to Tender Number 17/99 were not received in 1998-99.

Table 5: Swaps Executed by the Commonwealth in 1998-99

Interest Rate Swaps

(a) Life of swap at time of execution.

Cross Currency Interest Rate Swaps

(a) Life of swap at time of execution.