A break in the weather
Australian Business Economists luncheon | Sydney
Anna Hughes, CEO
“A break in the weather. Enjoying a period of blue skies during a pattern of bad weather.”
I would like to start with acknowledging the Gadigal people of the Eora nation as the Traditional Custodians of the Land on which we meet today. I would also like to pay my respects to their Elders – past, present, and emerging.
Thank you to ABE for the invitation to speak today. I am happy to follow in the footsteps of my predecessor and ABE Lifetime member, Rob Nicholl and see today as an opportunity to share the AOFM’s perspective on several important topics including my first impressions of the AOFM, our funding task given the Australian Government’s improving budgetary position and the AOFM's move into the world of sustainable finance. While I plan to answer your questions as to how we are thinking about the next year, I am mindful that I do not offer any information that can be misconstrued as upcoming action. Given the pattern of bad weather we’ve seen over the past several years, our thinking on a few issues may change in response to changing market conditions – be they good or bad. When our thinking does change, we’ll communicate it clearly to the market.
Please consider my words today, as our thinking, as it currently stands.
The year ahead – Australia’s improving budgetary position and the AOFM’s funding task.
Let me start with the Australian Government’s improving budgetary position, and how it will impact our issuance task over the year ahead.
Chart 1: Australia's budget balance. Underlying cash balance per cent of GDP
Source: Treasury – Budget 2023-24
As you would have seen at the time of the May Federal Budget, the last 12 months have seen a substantial improvement in the near-term fiscal outlook. In response to deviations from forecasts, the AOFM revised downwards its 2022-23 Treasury Bond issuance plans on three occasions: first from $125b to $95b, then to $85b and finally to $80b. With the end of the financial year only two weeks away, we are easily on track to meet this revised issuance target. Our cash position remains very strong thanks to the strength in tax receipts, and the government is now forecasting a small surplus.
Turning to the year ahead, the budget is forecast to return to deficit in 2023-24 and stay there over the forward estimates. For next year, we plan to issue around $75 billion in Treasury Bonds. Some in the market were surprised by the size of this issuance given that the budget is forecasting a headline cash deficit of $19.7 billion, and we have only one bond maturity: a $36 billion April 2024 bond. However, unlike 2024, future financial years have two Treasury Bond maturities totalling around $80 billion per year.
Funding only the minimum required amount in 2023-24 would lead to a large proportional increase in annual issuance the following year: from around $50 billion to $125 billion. In our view smoothing the bond maturity profile is helpful for market functionality. While we expect that the bond market could handle a large increase in issuance if required, investors and intermediaries appreciate the consistency of the AOFM’s approach to issuance.
In addition to consistency, we also need to consider how we support market functioning. An annual program of $50 billion is small in the context of the Treasury Bond market. If the AOFM is to maintain its market commitments of supporting a 30-year benchmark bond and the 10-year Treasury Bond future contracts such a small program would leave limited issuance to support the operation of other segments of the market.
While this $75 billion is higher than it would have been without the smoothing it is still the smallest issuance program since 2018-19.
Despite its small size, my attention over the past few months has been drawn to the Treasury Indexed Bond market. Over the first half of this year, we sought views from several market participants. During our consultations, investors highlighted the importance of the TIBs market and offered several options in terms of how the AOFM can continue to support the market. One key takeaway was for the AOFM to take a more flexible approach to the market with regards to issuance volumes and methods.
In response, the AOFM announced in its post Budget operational notice, a $2b to $4b TIBs issuance range for 2023-24. By increasing the potential issuance range, the AOFM is signalling to the market that it has the flexibility to respond to investor demand and market conditions. The market remains predominantly domestic and attracts investors such as superannuation funds. Having established a 2032 line in 2021, its unlikely that we’ll consider another new maturity in the short term.
Let me turn to the question of new benchmark Treasury Bond lines. While the AOFM will always retain flexibility, I would suggest that history does show a repetitive and somewhat predictable pattern to our activity. For example, making sure there is an appropriately sized and liquid benchmark line rolling into the 10-year futures basket at approximately 6-month intervals is well established. This will likely remain our baseline in the coming years. The other new benchmark, which I know is of great interest to this audience, is the next 30-year bond. The AOFM is resolutely committed to supporting the ultra-long segment of the yield curve and to maintaining a 30-year benchmark. The June 2051 bond is our current 30-year benchmark, and it continues to see good domestic and offshore interest from a range of different investors. We have tendered the June 2051 bond regularly this fiscal year. I have been just a little surprised by recent speculation that a new replacement 30-year benchmark is imminent, perhaps even as soon as next month. When the time is right, we will of course bring a new 30-year benchmark to market. You can expect this to be well telegraphed through the usual channels and transparent to all when we do. I’d like to reiterate that we will continue our practice of announcing our new bond lines at the start of either the new financial year or calendar year.
Chart 2: Treasury Bonds on issue
A change to the RBAs policy of holding government bonds to maturity has also been subject to some market chatter. While there has been considerable speculation around this, I would point out that the RBA's position on its bond holdings is the same today as it was prior to the release of the May Board minutes. That being said, that they have no current plans to sell and that their portfolio will simply run down passively with maturities. Should this position ever change, you can expect that we will work cooperatively with the RBA in the best interest of the AGB market. It would be in no one’s interest, least of all our own, if the RBA and AOFM were selling bonds into market in an uncoordinated manner. Given our shared interest in a functional and liquid market, I am confident that if the hypothetical were to become a reality, that it will be clearly and transparently communicated, and that any disruption will be avoided.
The world of sustainable finance
Moving now onto the world of sustainable finance.
Green Bonds have been on the AOFM’s radar for several years. In April 2023 they became government policy.
Establishing a green bond program will require a significant amount of coordination. The AOFM is working with Treasury, other parts of government, and external stakeholders. Other sovereign and state government issuers have already provided invaluable assistance and advice.
We will use advisors to help us, and Treasury set up the program. The process to appoint advisors is currently underway.
Consultations with investors and other interested parties will commence soon. This feedback will help us answer questions like:
- Which assets and projects should be funded by green bonds?
- Should we focus issuance into one line (to build liquidity) or multiple lines (to build a curve)?
- What tenor of bonds should be issued?
A Green Bond Framework will be published before we issue green bonds. The framework will detail:
- the categories of projects that will be funded by green bonds
- arrangements for selecting projects
- how issuance proceeds will be managed
- ongoing reporting on projects.
The Government has already started developing a climate reporting framework for Commonwealth budgeting purposes. The four categories of climate action currently are:
- reducing emissions in Australia’s energy system and broader economy
- improving climate change adaptability and disaster resilience
- international climate leadership
- and building the government’s climate capability.
The two most recent Budgets detailed new climate spending measures in each of these categories. The Budget papers note the Government's approach will evolve over time as the Government works with and learns from reporting entities and partners around the world.
A small team, headed by Brad Parry, has been established within our agency to help support this work. We plan to issue our first green bond in 2024. Strong demand is expected from current AGS investors, including many who manage dedicated ESG funds that cannot hold standard AGS. Green bonds will not impact the total stock of Government debt as they displace the issuance of other bonds.
It is also worth noting that the green bonds program is just one key step the government is taking as part of its Sustainable Finance Strategy.
My impressions of the AOFM and what you can expect to see
I’d like to switch my focus now, to the AOFM as an organisation.
I recently had a conversation with one of my peers around our vision for the future of our respective organisations. The analogy this colleague used was that as new CEOs we are like new homeowners. We’ve invested in a house because we can see that the foundations are solid and structural there aren’t a lot of changes that need to be made.
This is very much how I see the AOFM. I might change the paint colour on the walls, I’m certainly not going to change the structure of the house. I see my job, as CEO, to take a high performing team and make it better. In many ways, it is an enviable position to be in.
Externally, you are unlikely to see material changes to how the AOFM engages with market participants – specifically when it comes to consistency and transparency.
Internally, we’ll need to focus on addressing several key strategic issues. These include:
- exploring ways to attract and retain talent from around the country in a highly competitive labour market
- resourcing work which falls outside our core mandate
- managing the impact of government policies on our work, like the climate change agenda
- ensuring that our workforce has the tools they need to do their jobs.
Like many organisations, the hangover from the pandemic has impacted our workforce and turnover has been problematic at the individual contributor level. When it comes to recruitment, we are often competing with both the public and private sectors, and we have the added challenge of being based in Canberra.
Against this backdrop, I see one of my most important goals will be building on the AOFMs value proposition. We have started with defining our organisation values which neatly spell out TED: Trust, Excellence, and Diversity.
At a half day workshop, the team identified diversity as a key value. As an organisation we understand that diversity in gender, age, cultural background, and lived experience is important for individuals, teams, and organisations. We recognise that if we are going to continue to be a world class debt manager it is critical that we tap into the full talent pool.
The article, Why Diversity and Inclusion Matter published by Catalyst, Quick Take, on June 24, 2020, notes that organisations where women are highly represented in top management positions are more likely to attract other women to the organisation. Also, organisations with higher levels of gender diversity and with HR policies and practices that focus on gender diversity are likely to see lower levels of employee turnover. I believe women experience less discrimination and sexual harassment in inclusive workplace cultures. This is where we will start.
Given the numbers of women and people from diverse backgrounds completing university degrees in Finance related disciplines, we can no longer use pipeline as a reason not to do something that will ensure that we see more women joining the finance sector, staying in the sector, and participating in leadership roles. We need to be more deliberate about enabling participation. Our goals should shift from talking about improving diversity to backing it with actions – which will help to build psychologically safe workplaces and improve our performance.
Do we as a sector have the courage to act?
In summary, the year ahead for issuance and improving Budget forecasts looks like it will be set against the uncertain backdrop of market conditions. Just like the beginning of 2023, surprises can appear from nowhere. For us as an organisation, we will need to stay focused on the fundamentals of transparency and predictability. As we saw through the pandemic, our relationship with the markets is important and we will continue to work to protect those relationships.