1 / 17

Interest Rate Benchmark Review

Interest Rate Benchmark Review. Background. Outcome of CGS Review Consider cost/risk outcomes Manage to an interest rate benchmark Current benchmark introduced in 1996 Substantial savings to the Commonwealth to date Review of benchmark recently completed

benjamin
Télécharger la présentation

Interest Rate Benchmark Review

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Interest RateBenchmark Review

  2. Background • Outcome of CGS Review • Consider cost/risk outcomes • Manage to an interest rate benchmark • Current benchmark introduced in 1996 • Substantial savings to the Commonwealth to date • Review of benchmark recently completed • Benchmark explicitly determines cost/risk trade-off. • Low debt environment very important • Managing to new benchmark means re-entry into IR swap market • AOFM announced suspension of IR swap program in February 2002

  3. Agenda – September 29th • Measurement issues • Within-year variability in financing requirement • Modified Duration as a single risk measure • Nominal vs Inflation-linked debt • The New Interest Rate Benchmark • Two tiered limit framework • Portfolio Profiles • Current vs Benchmark • Swap Activity

  4. Within-year variability • Large swings in short-term assets make duration volatile • Short-term assets defease short-term liabilities • Previous approach focused on duration of total portfolio • (Mod) Duration target range of 3.0 to 3.5 • Have been outside target range for sustained periods • Nature of target range requires greater clarity

  5. Within-year variability

  6. Solution: Portfolio Split • Split the portfolio for interest rate risk management purposes • Long-Term Debt Portfolio (LTDP) • Include long-term debt and any long-term asset holding • Cash Management Portfolio (CMP) • Manage the within-year financing requirement • Average duration less than 0.5 • Transfers between portfolios are made on the basis of public information • See Operational Notices section of AOFM website for rules • Transfer data will not be made available on a real-time basis • Transfers should be verifiable

  7. Solution: Portfolio Split

  8. Duration as single risk measure • Duration is a single summary measure of interest rate risk / proxy for average term to repricing • Good measure for some interest rate shocks • May be misleading for some shocks • Detailed maturity/repricing profile of the portfolio is important

  9. Solution: A second risk measure • Use two measures of interest rate risk: • Modified Duration • Short-dated exposure • A measure of the proportion of the portfolio subject to immediate repricing when interest rates change • We will not specify the precise portfolio • Too prescriptive • Too difficult to build a compliance and reporting framework

  10. Nominal vs Inflation-linked debt • Previous duration measure did not distinguish between inflation-indexed and nominal debt • Distinction is more important as indexed debt becomes a larger proportion of the portfolio • Different interest rate changes affect indexed and nominal debt differently…

  11. Nominal vs Inflation-linked debt • Real interest rates change with no change in inflation: • inflation-indexed payments are stable • indexed debt’s cost resembles nominal debt’s cost • Inflation changes: • inflation-indexed payments change • indexed debt’s cost resembles floating rate debt’s cost

  12. Solution: Focus on nominal portfolio • Focus on the nominal debt portfolio • Express limit framework in terms of the nominal portfolio • No direct control instruments available for indexed debt • Report modified duration and short-dated exposure measures for both types of shocks for the LTDP • Note that these measures converge on the nominal portfolio measures as TIBs mature

  13. The New Interest Rate Benchmark Benchmark AUD Long-Term Debt Portfolio • Two-tiered limit framework • Operational Limits: Approved by Secretary to the Treasury • Policy Limits: Approved by Treasurer • Transition period of up to three years may be required

  14. Portfolio profiles contrasted Current A$ LTDP New Benchmark Portfolio Duration = 2.5 Duration = 2.0

  15. Portfolio profiles contrasted Current A$ LTDP New Benchmark Portfolio Duration = 2.5 Duration = 2.0

  16. Swap Activity 2003-04 • The swap program for 2003-04 is $6 billion to $10 billion. • Long-end receiving of $2 billion to $4 billion • Short-end paying of $4 billion to $6 billion • This will: • reduce modified duration; and • reduce short-dated exposure • Transition to the new benchmark will take up to 3 years • Expected commencement: Next week

  17. Questions?

More Related