Australian Government, the Australian Office of Financial Management

AOFM Activities for 2004-05

CEO Presentation
Sydney, Australia

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Australian Business Economists

AOFM – Activities for 2004-05

Presentation by Neil Hyden
Chief Executive Officer, AOFM

12 July 2004

Outline

  • Bond Issuance and Market Liquidity
  • Cash Management
  • Portfolio Management
  • Interest Rate Swaps
  • Collateral Arrangements

Bond Issuance – Objectives

  • We aim to maintain sufficient CGS on issue to support the Treasury bond futures market:
    – in order to maintain the role that Treasury bonds and bond futures play in supporting interest rate risk management in the economy.
    – as recognised in last year’s CGS review.

Bond Issuance – Objectives

  • Issuance is now targeted to maintain liquid and efficient CGS and Treasury bond futures markets.
    – Long-dated bonds to support the 10 year futures contract.
    – Mid-curve bonds to support the 3 year contract.
    – Each bond line to be built up to around $5 billion.
  • Around $5 billion of issuance each year.

Bonds on Issue
End June 2003

Bond Issuance in 2003-04

  • $3.2 billion issued across three different lines.
    – $1.8bn of April 2015;
    – $600m of August 2008;
    – $800m of February 2017;
  • April 2015
    – $5 billion now on issue.
  • August 2008
    – $5.1 billion now on issue.
  • February 2017
    – $800m on issue.

Bonds on Issue
End June 2004

Bond Issuance in 2004-05

  • Total issuance between $5 and $6 billion.
  • Supporting two new bond lines.
    – February 2017. Around $2.5bn to be issued in first 6 months of 2004-05.
    – New 5-year bond. Around $3bn to be issued in second half of 2004-05.
  • Indicative calendar of tender dates published on AOFM website.

Bonds on Issue
End June 2005

Monitoring of the Bond Market

  • Strengthened market contact over the past 12 months.
    – Strong liaison with market participants, RBA, AFMA and SFE.
  • AOFM looking to be responsive to developments in the market.
    – AOFM ready to receive on-going feedback from market participants.

Liquidity

  • Some pressures in the repo market in 2003-04.
    – Focused on bonds in the 3 and 10-year bond futures baskets.
  • AFMA paper on CGS liquidity.
    – Consistent pressures could impinge on liquidity and the price discovery mechanism underpinning bond futures contracts.
  • Suggested possible solutions.
    – Yield curve consolidation, vary issuance pattern, stock lending facility.
  • AOFM and Treasury examining these options.

Indexed Bonds

  • TIB issuance suspended post CGS review.
    – Bond issuance is now concentrated on Treasury bonds.
    – To avoid adding unnecessarily to the level of financial assets.
  • No TIB issuance for 2004-05.

Cash Management

  • Term deposits are now our primary cash management tool.
  • T-Notes secondary tool and issued as required.
  • T-Note issuance for 2003-04 was $1.1bn.
  • T-Note issuance for 2004-05 could be a little higher, reflecting within year cash flows.
    – But day by day cash flow timing is very variable.
    – Indicative tender schedules will continue to be provided throughout 2004-05.

Portfolio Management

  • We do not take positions in the portfolio, but manage it to a benchmark using swaps.
  • A new benchmark was approved by the Treasurer in September 2003:
    – Modified Duration of 2; and
    – Short Dated Exposure of 35%.
  • This is designed to have a lower interest cost over time.

Portfolio Management

  • Bond issuance to meet futures market objectives produces a relatively long duration portfolio.

Average Duration

through Bond Issuance

Portfolio Management

  • The benchmark has lower duration and lower expected cost.

AOFM Interest

Rate Benchmark

Portfolio Management

  • Receiving fixed in the long end reduces duration.

Portfolio Management

  • Paying fixed in the short end spreads reset risk.

Swap Activity 2003-04

  • Resumed executing interest rate swaps in October 2003.
  • Total program of $7.6 billion comprised:
    – $3.3 billion of short dated pay swaps.
    – $4.3 billion of long dated receive swaps.

Swap Activity 2004-05

  • Indicative Program.
  • Around $3 ½ billion of short dated pay swaps (terms 2 - 4 years).
  • Around $6 billion of long dated receive swaps (terms of at least 5 years).
    – Continue to test market appetite beyond 10 years.
  • Commencing later this week.

Swap Activity 2004-05

  • This program represents about the same monthly level of swap activity as in 2003-04.
    – When the program operated for only 9 months.
    – Whereas this year it will operate for 12.
  • It should allow us to complete the transition to the new benchmark portfolio by end June 2005, subject to market conditions and budget developments.

Collateral Arrangements

  • We are discussing with counterparties the introduction of collateral arrangements on our interest rate swaps.
  • Main features:
    – Club deal (collateral thresholds tied to credit ratings).
    – one-way collateral.
    – AUD cash only form of eligible collateral.
    – AOFM will pay interest at the RBA cash rate.
    – In the form of a Credit Support Annex to the ISDA Master Agreement.
  • Will provide draft CSA to counterparties shortly.

Australian Business Economists

AOFM – Activities for 2004-05

Presentation by Neil Hyden
Chief Executive Officer, AOFM

12 July 2004