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The Commonwealth Government Securities Market

The Commonwealth Government Securities Market. Michael Allen Australian Office of Financial Management. Introduction. Commonwealth financing task AOFM’s role AOFM funding activities. Commonwealth Government Financing Task. Headline Cash Balance*.

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The Commonwealth Government Securities Market

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  1. The Commonwealth Government Securities Market Michael AllenAustralian Office of Financial Management

  2. Introduction • Commonwealth financing task • AOFM’s role • AOFM funding activities

  3. Commonwealth Government Financing Task

  4. Headline Cash Balance* * Following recent changes in the Australian National Accounts Standards, the underlying and headline cash balance estimates in the chart from 1998-99 onwards include payments by the Commonwealth in respect of accumulated PTE superannuation liabilities.

  5. Net Funding Requirement

  6. Commonwealth Government Debt

  7. Fiscal Context • Government set out in Budget • a managed reduction in CGS • not to the full extent of projected reduction in net debt • maintain liquidity in benchmark lines • Formal market updates

  8. OECD Net Debt

  9. Fiscal Context • Australia in the vanguard of OECD countries in addressing a new set of debt management policy issues • benefits of maintaining sovereign curve

  10. Global Bond Indices AUD Share in Decline Source: Salomons WGBI

  11. MSCI Sovereign Debt Index Source: Morgan Stanley, Capital International

  12. CGL Market Outstandings Commonwealth State Corporate

  13. Role of the Australian Office of Financial Management

  14. AOFM • AOFM established 1 July 1999 • Debt management responsibility • Prudent Sovereign Debt manager

  15. AOFM • Australia among the leaders in the OECD in pursuing a complementary focus on reform of public sector financial management • Charter of Budget Honesty • Accrual budgeting, reporting and accounting

  16. AOFM • As with any corporate treasury function, sovereign debt management is a business exposed to a variety of financial risks • fiduciary responsibility to taxpayers • critical distinctions between sovereign and corporate

  17. AOFM • Policy constraints • Market liquidity • Risk free pricing benchmark • Commercial constraints

  18. AOFM • Risk Management Task • Debt issuance • Financial risk • Credit risk • Operational risk • Commonwealth approach is ahead of OECD practise.

  19. Debt Management Responsibility • Debt issuance • Risk management • Cash management • General Government interest calculations • Market communication

  20. Portfolio Management • Risk accountability • Passive approach • Benchmark portfolio • Risk management • Performance monitoring

  21. Funding Strategy Objectives • Sovereign Debt Manager • Flexible strategies • Investor demand • Liquidity premium • Market efficiency

  22. AOFM Funding Activities

  23. Debt Maturity Profile

  24. Change in Funding Source

  25. T-Note Funding

  26. T-Note Funding • Greater flexibility • Benchmark lines • Increase market liquidity • Benchmark short end curve • Assist RBA’s market operations

  27. T-Note Market Turnover

  28. T-Note Liquidity Ratio

  29. Short Term Debt Profile

  30. Inflation Linked Funding • Tender performance • Market review • $300m program • Fixed issuance dates

  31. Inflation Linked Funding

  32. Bond Market Funding • Focus on liquidity • Target long dated maturities • Regular tender program • $3.4 b 1999/2000 issuance

  33. Bond Market Activity

  34. Bond Market Maturity Profile

  35. Bond Maturity Profile - June 1988

  36. Funding Strategy Objectives Cost vs Risk Flexibility Transparency Benchmark Issuance Price Tension Commercial Funding Strategy - Background

  37. Primary Market Substitution Price Tension Secondary Market Curve Efficiency Curve Efficiency Secondary Market Liquidity Liquidity Premium Funding Strategy - Background

  38. Conclusion • Reduced Commonwealth financing task • Potential for further decline in relative liquidity • AOFM to provide regular updates

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