The AOFM meets the Australian Government’s financing requirements by issuing Australian Government Securities (AGS). Issuance by tender or syndication is known as a ‘primary’ market operation. The trading of AGS in financial markets between investors and banks is known as ‘secondary’ market activity and does not involve the AOFM.
Early buybacks of AGS are conducted at regular intervals to reduce the size of repayments at maturity and to enhance market liquidity. Buybacks may also be held concurrently with a syndicated issue or transacted directly with the Reserve Bank of Australia (RBA). The RBA regularly buys AGS as part of its liquidity operations and reports its holdings on its website.
The RBA operates a Securities Lending Facility for Treasury Bonds and Treasury Indexed Bonds on behalf of the AOFM. This aims to support liquidity in the ‘secondary’ AGS market.
Retail investors can invest in AGS through a product on the Australian Securities Exchange (ASX). Exchange-traded Treasury Bonds (eTBs) and exchange-traded Treasury Indexed Bonds (eTIBs) are electronically traded and settled through the ASX. For more information, please visit: https://www.australiangovernmentbonds.gov.au/.
Pay a fixed interest rate (a coupon) twice per year. The face value of the bond is repayable at maturity. Maturities range out to 30 years.
The capital value of these bonds is adjusted quarterly for movements in the Consumer Price Index (CPI). Interest is paid quarterly, at a fixed rate, on the adjusted capital value. The adjusted capital value of the bond is repayable at maturity. Maturities range out to 30 years.
These are short-term discount securities used for within-year borrowing. Treasury Notes do not pay coupons, however the face value repaid at maturity is higher than the price at which it is issued (i.e. they are purchased at a discount to the face value). The volume on issue varies depending on the AOFM’s need to manage the mismatch of within-year cash flows of government receipts and expenditures. Maturities can be as long as 12 months but typically range from 3 to 6 months.
The AOFM repurchases outstanding AGS through competitive tenders. The amount and maturity of securities to be repurchased are announced by the AOFM ahead of time. Registered Bidders can make offers to the AOFM that are accepted in descending order starting from the highest interest rate (lowest price) until the buyback amount has been filled.
The Australian Government maintains a group of bank accounts known as the Official Public Account (OPA). The balance of the OPA represents the government’s daily cash position. Cash proceeds not required for immediate purposes are invested in short-term liquid assets. Investment holdings are published monthly on the AOFM’s website (see 'End of Month Positions' then select 'Portfolio Aggregate').
Operated by the RBA on behalf of the AOFM, this is a facility to lend Treasury Bonds and Treasury Indexed Bonds to institutions when they are not readily available from other sources in the market. The aim is to support the efficient functioning of the ‘secondary’ market by allowing banks to cover demand when there are temporary gaps in availability for particular bonds.
eTBs and eTIBs provide a way for retail investors to invest in Treasury Bonds and Treasury Indexed Bonds. eTBs and eTIBs are quoted and traded on the Australian Securities Exchange (ASX). An eTB or eTIB holder has beneficial (as opposed to legal) ownership of Treasury Bonds or Treasury Indexed Bonds in the form of CHESS Depositary Interests (CDIs). This means obtaining all the economic benefits (including coupon and principal payments) of the Treasury Bond or Treasury Indexed Bond over which the CDIs have been issued. A single unit holding of an eTB or eTIB provides beneficial ownership of $100 Face Value of the Treasury Bond or Treasury Indexed Bond over which it has been issued.
Historical instrument and activities
Australian Savings Bonds
Australian Savings Bonds (ASBs) were debt securities aimed at retail investors from 1976 until 1987. There were many series of ASBs, each with a different interest rate and maturity date (generally up to 7.5 years). The ASBs were issued ‘on tap’, as demanded by retail investors, and were available in banks and post offices. During this time, Australian financial markets were more regulated than today. Whenever interest rate policy settings changed, the existing ASB series would be replaced by a new series reflecting the new rate. Investors could redeem ASBs early without penalty after a minimum holding period by giving a month’s notice.
A negotiable instrument, akin to cash, which evidences a payment obligation to be met on presentation at designated dates. The issuer of the instrument does not record the identity of the security holder, and the physical possession of the certificate is sufficient proof of ownership. The certificates for bonds issued as bearer securities normally carry detachable coupons. In the past, many Australian Government Securities (AGS) were issued in bearer form. Bearer securities have not been issued since 1984 (all securities now record the owner on a register).
Cross Currency Swaps
A cross-currency swap is a floating/floating swap where two parties borrow from – and simultaneously lend to – each other an equivalent amount of money denominated in two different currencies for a predefined period of time.
In 1988, a program of cross-currency swaps commenced to maintain a 10-15 per cent share of the Commonwealth’s debt portfolio in US dollars. In December 2000, the Treasurer initiated a review of this policy. In September 2001, the Treasurer endorsed the review’s conclusion to discontinue the policy. The AOFM then commenced a phased reduction of the foreign currency exposure in the Commonwealth debt portfolio to zero. By March 2004, all foreign currency derivative exposure had been eliminated from the portfolio.
Interest Indexed Bonds
Interest Indexed Bonds were a type of inflation-linked bond. Quarterly coupons were paid as a fixed real rate of interest rate plus an indexed amount applied to the face value of the bond. The indexed amount varied over time according to movements in the consumer price index (CPI). The bonds were repayable at face value on maturity. These bonds were issued between 1985 and 1988 and have all matured.
Interest rate swap
An agreement between two parties to swap interest payments. It usually involves one party exchanging a stream of fixed interest cash flows for a stream of floating interest cash flows. The AOFM undertook a program to unwind its existing interest rate swaps in 2008-09.
Securities which have passed their maturity date, but have not been redeemed by stockholders. Overdue securities issued by the Australian Government are predominately Treasury Bonds, Australian Savings Bonds and War Savings Certificates. The Australian Government repays the amount due when the stock is presented for payment. No interest accrues on the stock following its maturity date.
Residential Mortgage-Backed Securities (RMBS)
A debt instrument issued by a special purpose vehicle to finance the securitisation of a pool of residential mortgages. A description of the principal features of a typical RMBS transaction can be found on pages 30-31 of the AOFM’s 2008-09 Annual Report.
Special Bonds were a retail instrument issued on tap with an original maturity of around 7.5 years. There were numerous series of Special Bonds, each with different interest rates and maturity dates. A feature of Special Bonds was that the interest rate paid to investors stepped up over time until the maturity date. The face value of the instrument repaid to investors increased over time to a maximum of 103 per cent of the par value. Special Bonds were issued between 1959 and 1976. They were the forerunner of the Australian Savings Bond.
Tax Free Stock (TFS)
Stock with no fixed date of maturity issued by the New South Wales, Victorian and South Australian Governments prior to 1 January 1924. Under the Financial Agreement Act 1994, Tax Free Stock is administered by the Australian Government on behalf of State governments.
Treasury Adjustable Rate Bond (TAB)
A medium-term debt security issued by the Australian Government from 1994 to 1997 that carried an interest rate adjusted quarterly in line with movements in the bank bill swap reference mid-rate, payable on the face value of the security. TABs were repayable at face value on maturity.
War Savings Certificates (WSC)
War Savings Certificates were securities issued by the Australian Government in bearer form to raise funds during both World Wars. The securities had maturities ranging from 3 to 10 years in the case of World War I, and 5 to 7 years in the case of World War II. Certificates were issued at a discount, with interest being incorporated in the face value of the certificate payable at maturity. All outstanding War Savings Certificates are now overdue securities.