The AOFM is responsible for managing the debt and cash portfolios of the Australian Government. The AOFM also undertakes investments on behalf of the government to support securitisation markets.
Planning our cash and debt management activities
The Australian Government’s annual Budget and Mid-Year Economic and Fiscal Outlook contain official revenue and spending forecasts. The AOFM forecasts daily government cash flows using advice from agencies (such as the Australian Taxation Office and the Department of Finance). The AOFM uses these forecasts to plan its annual borrowing program to ensure that the government always has enough money to make payments.
In performing these activities the AOFM manages various risks including (but not limited to) forecasting risk, interest rate risk and re-financing risk. To manage these risks the AOFM makes decisions on the amount of cash to hold, the tenor of issuance, the method and rate of issuance and the specific securities to issue (or repurchase) among other things.
How does the AOFM borrow money?
Borrowing money on behalf of the Commonwealth involves dealing directly with financial markets. The AOFM deals only with Registered Bidders (banks that buy and sell large volumes of bonds in global financial markets and have registered through contractual arrangements to participate in AOFM tenders). Investors including superannuation and pension funds, central banks, insurers, hedge funds and other banks buy bonds from (and sell bonds to) these banks.
The AOFM currently issues three different instruments: Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. Collectively, these instruments are referred to as Australian Government Securities (AGS). Treasury Bonds pay a fixed amount of interest (called a coupon) twice each year until the bond matures. Treasury Indexed Bonds pay a quarterly coupon that is linked to inflation. Treasury Notes are short term instruments that do not pay a coupon.
How do these transactions work?
Most AOFM issuance is via tenders (competitive auctions) that are run on an electronic trading platform. Registered Bidders can submit bids for a particular amount of a bond at the price they are prepared to pay. Tenders run for 15 minutes. The AOFM allocates bonds up to the pre-advised volume to those bids at the highest prices (lowest yields) to enable borrowing at the lowest rate available at the time of the tender.
The AOFM may also issue via syndication. Syndications involve the appointment of banks as Joint Lead Managers to perform a book-build process directly with investors. Investors place orders by nominating the volume they want to buy of the bond being issued at a particular price within a price range set by the AOFM. The AOFM sets the final price and determine how much of each order will be filled at that price. Syndications can be used for establishing new bond lines or occasionally for issuing existing bond lines.
These transactions are then settled in a system called Austraclear. The AOFM will deliver the securities on receipt of payment.
How does the AOFM decide which securities to issue?
The AOFM sets an issuance strategy for each year. It is based on the mix of long-term and short-term debt and the mix of Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. The AOFM aims for an outcome that balances the various risks and costs involved with different approaches under a range of possible financial market scenarios.
The AOFM closely monitors financial market trends and events and liaises regularly with Registered Bidders and investors. In addition, the AOFM models a range of fiscal and economic related scenarios to test the robustness of its judgements under different financial market conditions.
Investment in securitisation products
The AOFM administers two funds which are for investing in securitisation products - the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF). Securitisation is one way that lenders can finance loans to households and businesses, often at a lower cost than other types of financing.
The ABSF was announced in November 2018 to support the provision of, and develop the market for, finance to lenders for small to medium enterprises (SMEs). A key barrier to SME lenders accessing securitisation financing is a lack of a public track record on the performance of pools of SME loans over time. The AOFM may invest up to $2 billion in securitisation products which finance loans to SMEs. This aims to develop the market by assisting SME lenders to establish a track record of performance, which makes these products more attractive to other investors.
The SFSF was established in March 2020 as part of the Government’s economic response to COVID‑19. The AOFM may invest up to $15 billion in securitisation products which finance mortgages and other loans to businesses and consumers. Maintaining access to finance for small lenders during the impact of COVID-19 supports competition in the lending market, helping to keep borrowing costs low for businesses and consumers.
For more information, see Securitisation Investments.