Review by the Chief Executive Officer
Context and issuance conditions
Core responsibilities for the AOFM remained unchanged during 2020-21. We remain focused on: ensuring Government cash needs are always met; achieving the Budget financing task; management of the Australian Government Securities (AGS) portfolio with a view to promoting market integrity while balancing a range of medium to long term portfolio cost and risk considerations; and effective management of the Australian Business Securitisation Fund (ABSF) and Structured Finance Support Fund (SFSF).
The Budget financing task and issuance
The Government’s funding requirements remained high (even compared with 2019-20) due to the ongoing impact of the COVID-19 pandemic. However global financial market conditions were generally supportive of high issuance tasks.
Throughout 2020-21, central banks maintained their policy settings consistent with appreciable monetary easing. There were periods where economic conditions in Australia (and in the major global economies) showed distinct signs of a building recovery. However, subsequent outbreaks of a more highly infectious variant of COVID-19 interrupted the emergence of recovery trends. This has left economic forecasts balanced between further near-term recovery and some setbacks. Globally there has been an intensifying debate around the prospect of a sustained return of higher inflation; this has been central to the outlook for monetary policy settings. In the meantime, central banks have continued to play a dominant role in the functioning of financial markets and the near-term outlook for yields. This has been as true for the AGS market as for other sovereign bond markets, although yields for AGS maturities of 12 years and longer tend to be influenced more by overseas markets than by domestic policies.
The AOFM spent a considerable amount of time in the last year briefing and receiving comments and observations from investors – domestic and offshore. Overall, the AOFM’s assessment of little underlying change in the breadth and composition of the investor base over the past 18 months continues to hold. However, in some respects, the market has become more difficult to ‘read’ given the impact of RBA operations. That said, the view from offshore investors generally has been consistent around a theme of a well-managed sovereign bond market.
Yields were steady around historic low levels for the first half of 2020-21, before rising at the beginning of calendar 2021, a repricing that reflected widespread momentum in expectations for emerging inflation. Although yields finished 2020-21 markedly higher than for the previous two years, they are still low by historic standards. Short-dated yields remained anchored at extremely low levels by the RBA’s cash rate and yield target settings. Therefore, when yields were rising the difference between short and long dated yields became relatively wider than normally observed, which reduces the incentive for the AOFM to issue ‘long’.
The financing task for 2020-21 was met through a combination of $207 billion in Treasury Bonds issuance, and around $2.5 billion in Treasury Indexed Bonds issuance; there was a net decrease to Treasury Notes outstanding of $31.5 billion. This compares with planned issuance at the time of the 2020-21 Budget of around $240 billion for Treasury Bonds and $2.5 billion for Treasury Indexed Bonds, with no planned appreciable change in Treasury Notes outstanding.
Securitisation investment funds
The ABSF is a $2 billion investment fund, established in April 2019, with the aim of enhancing access to finance for small to medium enterprises (SMEs) through targeted Government investments in the securitisation market. The AOFM has now gained sufficient understanding of how the ABSF can be used to support smaller lenders to compete more effectively with the major banks, and to fill niche gaps in the lending market otherwise underserved in Australia.
The AOFM has worked with representation from the securitisation market and one of the major ratings agencies to establish a data template that can be adopted by the industry to make available loan performance for this sector. Over time performance data should underpin establishment of a track record in lending against types of collateral new to the securitisation market, and where the ability to obtain credit ratings and attract broad investor interest is currently limited. As loan performance data become more uniformly and readily available the sector should attract more private sector investment, thereby enhancing the flow of capital to the SME lending sector.
The SFSF was established to provide access to funding markets by eligible lenders impacted by economic effects of the COVID-19 pandemic. The Fund was successfully used by the AOFM to maintain access to reasonably priced funding for smaller lenders otherwise at risk of losing access to this during the pandemic. The need for Government support through the SFSF abated noticeably during the year.
The AOFM took a multi-faceted approach: supporting new issuance of public securitisations sponsored by eligible lenders; investing in revolving warehouse facilities of eligible lenders; and establishing a ‘forbearance trust’ to provide cash flow support to eligible lenders against loans experiencing temporary COVID 19 related hardship.
In total the SFSF has been used to support 41 eligible lenders, through commitments and investments of $3.8 billion.
Chief Executive Officer