The AOFM currently has three different debt instrument choices — nominal Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. The primary objectives of issuance are to cost‑effectively meet the Government’s budget financing task (including both deficit financing and repayment of maturing debt obligations) and to assist in managing portfolio level financial risks such as interest rate, liquidity, funding and debt refinancing risk.
Treasury Bonds are used as the primary funding tool to meet the budget financing task. Treasury Indexed Bonds make up a small part of budget financing and issuance is primarily to support the inflation‑linked market. Treasury Notes are typically issued as a within‑year financing tool but may also serve as a funding tool in times of heightened, unforeseen liquidity requirements (such as those experienced from March 2020).
Through its operations the AOFM aims to be a credible custodian of the AGS market and support the efficient functioning of Australia’s financial markets more broadly, with careful consideration to:
the role of AGS and Treasury Bond futures as reference points for the pricing of other capital market instruments and to manage interest rate risk; and
the importance of active and efficient sovereign debt markets (both the physical and futures markets) to the robustness of the broader financial system and its resilience to economic shocks.
A key element of market efficiency that is important to issuers, intermediaries and investors is market liquidity. Bond market liquidity is broadly taken to mean the ability to trade bonds at short notice and at low cost without materially moving prices. Strong liquidity is attractive to investors and reflects favourably on a sovereign bond market but will vary across maturities along the yield curve. There is no single measure of liquidity because it is an assessment by individuals (and institutions) based on a number of considerations. These considerations include, but are not restricted to: turnover in secondary markets; the frequency of primary market activity; bid‑offer spreads; and the time it takes to execute ‘large’ transactions.
Approach to achieving these aims and market influences
The AOFM uses competitive tenders and syndications to conduct debt issuance. Competitive tenders are the mainstay of AOFM’s issuance operations. In 2019‑20 there were 79 Treasury Bond tenders, 14 Treasury Indexed Bond tenders and 50 Treasury Note tenders. Two new Treasury Bond lines were launched by syndication and one new Treasury Bond line was launched by tender.
The Government’s funding requirements were considerably higher than last year. A balanced budget was expected for 2019‑20. However, the COVID‑19 crisis and associated fiscal response packages dramatically increased the budget financing task.
Through the first half of 2019‑20, Treasury Bond yields traded within a 50 basis point range (at all tenors). Below target inflation and a gradual rise in the unemployment rate resulted in central banks easing monetary policy settings in Australia and abroad. Yields fell to historic lows early due to low inflation, but ultimately followed global yields higher. AGS yields at all tenors remained lower than US Treasury Bonds.
The second half of 2019‑20 was defined by the global economic, fiscal and market impacts of the COVID‑19 pandemic. With the onset of the crisis, a flight to high quality defensive assets drove sovereign yields to historic lows. Muted expectations of economic output and inflation due to worldwide economic shutdowns exacerbated this trend. As a result, a combination of factors including restricted access to funding channels, an abrupt and widespread requirement for redemptions and asset reallocations together triggered a wave of selling in the month of March. Market intermediaries struggled to absorb the large volume investor selling and some reached balance sheet risk limits, which created severe domestic market congestion. The yield on 10 year bonds increased by around 100 basis points in just two weeks. The bid‑offer spread on 10 year bonds reached as high as 10 basis points compared to a pre‑COVID‑19 norm of on average 1 basis point (indicative of market function).
In response, the AOFM suspended issuance into the Treasury Bond market to allow congestion to clear. The Treasury Note market remained open for issuance throughout the crisis and proved vital in meeting the financing task. The RBA stepped in with a range of announcements on 19 March, including an operation to purchase AGS in the secondary market so as to help clear trading congestion due to the market dislocation, and to achieve a 3 year yield target of around 0.25 per cent.
The RBA’s announcement and the commencement of its operations together with the AOFM’s issuance decisions immediately helped lower yields, clear intermediary balance sheets and reopen the Treasury Bond primary market. Throughout the remainder of 2019‑20 the RBA purchased around $40 billion of AGS with tenors up to 10 years. This, together with the issuance suspension, removed much of the dislocation in the market.
The fiscal support in response to the COVID‑19 crisis and decreased tax revenues drastically impacted the budget position. The AOFM was subsequently tasked with issuing at a record rate to meet the increased financing task in the final quarter. Treasury Bonds and Treasury Notes were tendered at record pace in conjunction with record size syndications into 3 and 10 year basket lines.
Monetary policy easing and government purchases around the world in response to the COVID‑19 crisis resulted in global bond yields falling. AGS yields did not fall as much as in some other countries leaving the AGS curve higher yielding and relatively steeper compared with other highly rated sovereigns, most notably the US. The steepness and the positive spread to US Treasuries drew strong offshore interest in AGS and helped to support AOFM’s increased issuance task.
Buybacks of short‑dated Treasury Bonds were conducted via tenders until mid‑March 2020. The AOFM ceased all buyback tenders when the RBA began purchasing AGS in the open market and this operation remained inactive at the end of the year.
Meeting the Budget financing task
The financing task for 2019–20 was fully met. A total of $128.2 billion of Treasury Bonds and $1.65 billion of Treasury Indexed Bonds were issued during the year. Treasury Notes outstanding were increased to over $58 billion. Issuance was considerably higher than expected at the time of the 2019–20 Budget, where in face value terms around $58 billion for Treasury Bonds and $2.5 billion for Treasury Indexed Bonds had been forecast (planned).
Gross Treasury Bond issuance for the year totalled $128.2 billion. This was a significant increase from the $55.0 billion of Treasury Bonds issued in 2018–19. New bond lines maturing in November 2024, December 2030 and May 2032 were established over the year. Around 44% of 2019‑20 Treasury Bond issuance was into these new bond lines. Syndications of the November 2024 and December 2030 accounted for a quarter of the 2019‑20 program alone.
In selecting the bond lines to issue each week, the AOFM continued to follow its standard practice of taking into account prevailing market conditions, liaison with financial market contacts, relative value considerations, and the liquidity of outstanding bond lines. Between July 2019 and March 2020, one or two tenders were held each week. Usually this was in the form of a larger tender for a 10 year basket stock and a smaller tender for a longer‑dated bond. From April 2020 onwards both tender sizes and frequency were increased reflecting the need to scale up funding to meet the increased financing task. Issuance from April to June was concentrated into 3 and 10 year basket bonds, which contributed to a drop in the average issuance tenor.
At the end of the year, there were 26 Treasury Bond lines, with 6 of these lines having over $30 billion on issue and a further 11 having over $20 billion on issue. Chart 1 shows Treasury Bonds outstanding as at 30 June 2020 and the allocation of issuance across bond lines during 2019–20.
Table 2 summarises the results of Treasury Bond tenders conducted during the year. The results are shown as averages for each half‑year and grouped by the maturity dates of the bonds offered.
Summary of Treasury Bond tender results
Face value amount allocated ($m)
Weighted average issue yield1 (%)
Average spread to secondary market yield (basis points)
Average times covered
July - December 2019
Up to 2027
2028 – 2032
2033 – 2047
January - June 2020
Up to 2027
2028 – 2032
2033 – 2047
1 Shown is the simple average of the face value‑weighted issue yield across all tenders within the tenor range and tender date range indicated, consistent with past annual reports.
The average coverage ratio for all Treasury Bond tenders in 2019–20 was 3.67, an increase from 3.57 in 2018–19. The average tender size of $1.2b billion was higher than in 2018‑19 ($829 million). A total of 79 tenders were held in 2019‑20, an increase from 62 in 2018‑19.
An increase in the funding requirement led to an increase in all metrics between the first and second half. Tender sizes were larger, more tenders were held, and they were spread more evenly across the curve in the second half of the year. Increased issuance was met with increased demand by intermediaries. Tenders in the second half of the year attracted higher coverage ratios and lower spread to secondary market yields.
Shorter‑dated bond tenders generally received a greater volume of bids (higher than average coverage ratios), which reflected both core investor base interest and ability of intermediaries to warehouse shorter dated bonds.
The strength of bidding at tenders was also reflected in issue yield spreads relative to secondary market yields. At most Treasury Bond tenders the weighted average issue yields were below prevailing secondary market yields (a competitively stronger outcome for the government).
Treasury Bonds were again repurchased ahead of maturity in 2019‑20 (as had been the case the previous year), all of which were bonds maturing after 30 June 2020; this included:
20 Treasury Bond buyback tenders were conducted, at which $9.0 billion of bonds were repurchased; and
a small amount of bonds were repurchased from retail investors who sold their holdings via the Australian Government Securities Buyback Facility.
In response to the market dislocation of March the RBA began purchasing AGS in the secondary market under its Long‑Dated Open Market Operations program. The AOFM subsequently ceased all buyback tenders until further notice (since revised to be no earlier than 2021‑22). The RBA may also repurchase near‑maturing AGS in its Open Market Operations.
Buyback tenders are effectively a reverse of normal competitive issuance tenders. The AOFM sets the total volume of bonds it is prepared to buy back and offers from intermediaries are accepted from the highest yield (lowest price) in descending order until the total volume is reached. All Treasury Bond buybacks other than those from retail investors were of lines shorter than the three‑year futures basket.
The volume outstanding in short‑dated Treasury Bonds was reduced as illustrated in Chart 2.
 Shown is the simple average of the face value‑weighted issue yield across all tenders within the tenor range and tender date range indicated, consistent with past annual reports.
Treasury Notes on issue increased by $58 billion in 2019‑20. There were 50 Treasury Note tenders conducted during the year.
In the first half of 2019‑20, Treasury Notes were primarily used as a within‑year financing tool. Issuance tenors were focused around 3 and 6 month maturities.
In the second half of 2019‑20, the increased financing task (at short notice) required Treasury Notes to be used as a funding tool. Issuance rates were increased to record pace and maturities up to 11 months were issued. The AOFM’s increase in issuance was met with strong investor demand.
Table 3 summarises the results of Treasury Note tenders conducted during the year. The results are shown as averages for each half‑year and grouped by the maturity dates of the notes offered.
Table 3: Summary of Treasury Note tender results
Face value amount allocated ($m)
Weighted average yield2 (%)
Average spread to Overnight Index Swap (basis points)
Average times covered
July - December 2019
Up to 120 days
121 day - 210 days
Longer than 210 days
January - June 2020
Up to 120 days
121 days - 210 days
Longer than 210 days
2 Shown is the simple average of the face value‑weighted issue yield across all tenders within the tenor range and tender date range indicated, consistent with past annual reports.
Treasury Indexed Bonds
Treasury Indexed Bond issuance for the year totalled $1.65 billion over 14 tenders. The volume of each line outstanding, relative yields and other prevailing market conditions were considered in fortnightly issuance decisions. Low CPI expectations in Q3 2019 associated with (and in fact exacerbated by) the COVID‑19 crisis decreased demand for Treasury Indexed Bonds. Several tenders were cancelled and tender sizes were decreased in response to the decrease in demand.
Chart 4 shows the amount outstanding in each of the eight Treasury Indexed Bond lines as at 30 June 2020, and the allocation of issuance during the 2019–20 year.
Just less than 10 per cent of the long‑term debt portfolio is in the form of Treasury Indexed Bonds, the capital values of which are adjusted with changes in the CPI. The issuance of these bonds typically attracts a different (and predominantly domestic) class of investor compared to Treasury Bonds. When the market was reopened during the GFC the objective was to broaden the AGS investor base; Indexed Bonds continue to provide a source of diversification in the funding base (although this has diminished in importance as the size of the financing tasks has grown). While the Indexed Bond portfolio has declined as a share of the long term funding, the total stock outstanding of indexed bonds has continued to grow.
Tender coverage ratios were slightly higher in 2019‑20 (4.70 compared with 4.40 in 2018‑19). This is a function of the decision to lower the overall issuance volume in 2019‑20 in response to market conditions and to reduce tender sizes (the average tender size was $118 million in 2019‑20 compared with $143 million in 2018‑19). At most tenders, the weighted average issue yields were below prevailing secondary market yields.
Full tender details are available in Part 5 of this annual report.
AGS market liquidity and efficiency
Treasury Bond market liquidity was significantly impeded for around six weeks by the COVID‑19 financial crisis. Market liquidity was strong in the first half of 2019‑20 with 10‑year Bid‑Offer spreads around 1 basis point and price discovery efficient.
The onset of the COVID‑19 crisis in March resulted in a significant wave of Treasury Bond selling by investors, which hampered intermediaries’ ability to make prices. Bid‑offer spreads widened to around 10 basis points at the height of the market dislocation. During this period the AOFM was unable to meaningfully issue Treasury Bonds. The dislocation prompted the RBA to introduce a bond purchase program to ‘clear the market’. This helped alleviate the balance sheet pressures of intermediaries (by relieving volume and risk limit related constraints on trading) and allowed the market to get back to more efficiently making prices. Liquidity slowly returned to the market but this was mainly in the futures basket bonds. Ultra‑long bonds, which were generally less liquid pre‑crisis, traded poorly despite the steepness of the yield curve. By the end of the year bid‑offer spreads had returned to pre‑crisis levels.
Turnover of Treasury Bonds increased 19 per cent from the 2018‑19 volume. This was facilitated primarily by increased AOFM primary issuance.
AOFM monitoring of the market indicates that liquidity in Treasury Indexed Bonds has continued to prove more challenging than for Treasury Bonds (although it has tended to vary appreciably throughout in year). This is consistent with the experiences of other sovereign inflation‑linked markets. Treasury Indexed Bond turnover in 2019‑20 was around $49 billion, a decrease of 7 per cent from the 2018‑19 volume.
Treasury Indexed Bond market liquidity deteriorated in the first‑half of 2019‑20. A decrease in break‑even inflation led to a fall in investor demand. Fewer intermediaries actively made prices as a result. During this period the AOFM took extended breaks between tenders on occasions.
The COVID‑19 crisis subsequently led to a large wave of selling in inflation linked bonds. Break‑even inflation fell to record lows, but liquidity slowly returned as markets and break‑even inflation rebounded.
There was tightness in several indexed bond lines at times during the year, requiring some market participants to borrow these lines from the securities lending facility.
Treasury Bond Futures Turnover
Turnover in the Treasury Bond futures market is significantly higher than in the underlying Treasury Bonds. The three and 10 year Treasury Bond futures contracts are highly liquid: over 58 million three year contracts (representing $5.8 trillion face value of bonds) and over 56 million 10 year contracts ($5.6 trillion face value of bonds) were traded in 2019–20. Turnover in the 20 year contract is considerably lower: around 190,000 contracts (or just over $12.0 billion face value of bonds) were traded.
In the first half of 2019‑20, the futures baskets traded very near the underlying bonds in basket bonds. All contract close‑outs occurred smoothly.
In the second half of the year, bond futures liquidity was hampered. The baskets traded cheap to the underlying bonds, and contract close‑outs were significantly congested. Three‑year Treasury Bond futures contract volume began to decline following implementation of the RBA’s three‑year bond yield target operation.
Securities Lending Facility
The AOFM Securities Lending Facility allows market participants to borrow Treasury Bonds and Treasury Indexed Bonds for short periods when they are not otherwise available in the secondary market. This enhances the efficiency of the market by improving the capacity of intermediaries to continuously make two‑way prices, reduces the risk of settlement failures, and supports market liquidity. The facility was used 163 times for overnight borrowing in 2019–20 compared with 21 times during 2018‑19. The volumes borrowed were also higher than in 2018–19, with the total face value amount lent in 2019–20 being $2,653 million, an increase from $393 million in the previous year. Treasury Indexed Bonds of all tenors are the main security borrowed from the Securities Lending Facility owing to the lower liquidity in the Treasury Indexed Bond repo market. Ultra‑long and short‑dated Treasury Bonds were also borrowed from the Securities Lending Facility. This is expected as these bonds generally exhibit lower liquidity and have less stock available for trading in the secondary market.
Cost across AOFM portfolios
Debt portfolio cost outcomes according to a number of perspectives are presented in this section.
The AOFM is tasked with meeting the Budget financing task while managing the trade‑offs between cost and risks for the cash and debt portfolios over the medium‑long term. Funds in the investments for policy purposes portfolio have investment return considerations as described later in this section.
Approach to achieving the aims
The AOFM utilises cost and risk measures that reflect considerations faced by sovereign debt managers generally. The primary cost measure used by the AOFM is historic accrual debt servicing cost. This includes interest payments made on AGS, realised market value gains and losses on repurchases, capital indexation of indexed debt, and the amortisation of issuance premiums and discounts. The effective yield of the portfolio is the total accrual debt servicing cost expressed as a percentage of the stock of debt outstanding. The use of an historic accrual debt service cost measure excludes unrealised market value gains and losses.
An alternative measure of cost is ‘fair value’, which takes account of unrealised gains and losses resulting from movements in the market value of debt and assets. Debt service cost outcomes are presented in the AOFM’s financial statements on this basis. A comprehensive income format is used that allows revenues and expenses on an historic basis to be distinguished from the effects of unrealised market value fluctuations. Fair value facilitates an assessment of financial risk exposures and changes in those exposures from year to year, the value of transactions managed and the economic consequences of alternative strategies. It is most useful in the context of trading for profit making purposes (which does not relate to the AOFM’s core operations).
The debt servicing cost1 of the net portfolio managed by the AOFM in 2019–20 was $17.02 billion on an average book volume of $569.32 billion, representing a net cost of funds of 2.99 per cent for the financial year. The largest component of the overall portfolio is the Long Term Debt Portfolio (LTDP), comprised primarily of Treasury Bonds and Treasury Indexed Bonds, which incurred debt servicing costs of $17.01 billion on an average book volume of $575.70 billion, implying a cost of funds of 2.95 per cent. The difference between the total cost measure and the cost of the LTDP is attributable to the short term assets and liabilities the AOFM uses for liquidity management purposes (term deposits and Treasury Notes) and returns on other assets.
Table 4 provides further details of the cost outcomes for the portfolio of debt and assets administered by the AOFM broken down by instrument and portfolio for 2019‑20 and 2018–19.
Table 4: Commonwealth debt and assets administered by the AOFM
Debt servicing cost
per cent per annum
CONTRIBUTION BY INSTRUMENT
Treasury Indexed Bonds
Term deposits with the RBA
State housing advances
Contribution by portfolio
Long Term Debt Portfolio
Cash Management Portfolio
Investments for Policy Purposes Portfolio
Total debt and assets
Total after re-measurements
Note: Sub totals and totals are actual sum results, rounded to the nearest million dollars. Effective yields are based on actual results before rounding, rounded to two decimal places. Book volume is a through the year average.
(a) Re‑measurements refer to unrealised gains and losses from changes in the market valuation of financial assets and liabilities.
The cost of gross AGS on issue decreased by $0.84 billion compared to the previous year. This was despite an increase in the average volume of debt on issue of $42.11 billion; it reflects the funding cost of gross debt having declined by 37 basis points to 2.88 per cent. This improvement was driven by the issuance of new bonds at yields that were below the average of debt on issue.
The return on gross assets in dollar terms for the period was $118 million, a decrease of $447 million compared to 2018–19. This was driven by a $289 million decrease in income from term deposits (resulting from lower interest rates) as well as a $156 million reduction in income on state housing advances following the recorded loss in relation to the waiver of Tasmanian housing loan advances (a policy decision taken by the Australian Government). SFSF investments also recorded a loss due to the recognition of the economic impact of providing below‑market (concessional) financing. In percentage terms the return on gross assets decreased by 168 basis points to 0.45 per cent.
The net cost of the combined portfolio of debt and assets was $17.02 billion. This was lower in dollar terms than in 2018–19, primarily due to the issuance of new bonds at yields that were below the average of debt on issue. In percentage terms, net debt servicing costs fell from 3.31 per cent to 2.99 per cent, slightly less than the decrease in gross debt servicing costs.
Movements in market interest rates increased the market value of outstanding debt in 2019–20. Unrealised losses from re‑measurements amounted to $9.19 billion. This compares to an unrealised loss of $43.55 billion in the previous year. Most of the re‑measurement losses are attributable to changes in the market value of Treasury Bonds. Re‑measurement items are highly volatile from one year to the next and have no bearing on the AOFM’s debt issuance strategy. Indeed, were the AOFM to adopt a strategy designed to minimise the volatility of the market value of debt, issuance would be limited to only very short‑term debt securities. However, this would create a portfolio structure that would maximise expected variability in debt servicing costs when measured in cash, accrual and public debt interest terms, while also maximising exposure to refinancing and funding risk. In practice the AOFM has been seeking to reduce these risks through allocating a greater proportion of issuance to long‑dated bond lines.
Long-term debt portfolio management
In managing the LTDP and meeting the government’s financing requirements, the AOFM aims to minimise debt servicing costs over the medium‑long term, while effectively managing future funding and refinancing risks. It also seeks to maintain liquid bond lines to facilitate cost‑effective issuance of debt through time.
Approach to achieving the aims
The AOFM influences the cost and risk profile of the LTDP through the maturity structure of the securities it issues (and to a lesser extent, the mix between nominal and inflation‑linked securities). Issuing longer‑term securities will typically involve paying higher debt servicing costs (in the presence of a positive term premium)2 although this is compensated by reduced variability in future interest cost outcomes and lower exposure to refinancing risk.3 Issuing shorter‑term debt securities will typically incur less interest cost (avoiding a term premium), but result in higher variability in cost outcomes through time and a greater debt refinancing task. Striking the right balance between these cost and risk considerations, while providing consistent and transparent stewardship of the bond market, is a debt manager’s ongoing challenge.
Developing a medium‑ to long‑term view on appropriate portfolio management and then translating that into annual issuance strategies is informed by an ongoing research program. This explores the cost and risk characteristics of alternative portfolio structures and issuance strategies under a wide range of scenarios; the program takes into account prevailing fiscal and economic conditions, as well as an assessment of broader market trends. The AOFM 2019‑20 issuance strategy was approved by the Treasurer at the time of the Budget. A range of complementary limits, thresholds, guidelines and targets governing AOFM operations were endorsed by the Secretary to the Treasury. These governance arrangements provide oversight for the impact of AOFM’s gross issuance decisions each year. In March 2020 the strategy was revised to reflect the substantive changes to the fiscal outlook and market conditions as a result of the COVID‑19 pandemic.
Weekly decisions focus on method (tender or syndication), volume and maturities to be issued. These operational decisions are influenced by several factors including prevailing market conditions, progress toward achieving the annual issuance strategy, relative value considerations and feedback from intermediaries and investors.
Long-Term Debt portfolio issuance strategy
The issuance strategy for 2019‑20 was formulated and approved amid a strengthening global economic environment, and was in large part influenced by a continuation of low outright bond yields (from a historical perspective), and a low term premium. The strategy required a bias toward longer‑term issuance and further lengthening of the average term to maturity of the debt portfolio. The strategy also aimed to support diversity in the AGS investor base (offshore investors for example ted to have a stronger presence in the long‑end of the yield curve) and was complemented by a regular program of bond buyback tenders.
The 2019–20 strategy was also designed to preserve the AOFM’s operational flexibility under a wide variety of circumstances, while continuing to benefit from the relatively low interest rates on offer. Operational flexibility was utilised when the AOFM temporarily suspended issuance at the height of the financial market volatility in March 2020. The annual issuance strategy was subsequently revised in response to the rapid increase in the Budget financing task, heightened bond market volatility, and shifts in investor demand preferences. The focus of the updated strategy was on achieving the large volumes of financing required to meet the government’s immediate needs at short notice and under highly stressed market conditions.
Debt cost outcomes are driven in large part by the level of bond yields, which fell during 2019‑20. Major central banks increased monetary ‘easing’ leading to lower government bond yields (Chart 7). The outlook changed again and abruptly in March 2020. AGS yields decreased markedly and the yield curve steepened significantly through the second half of 2019‑20 as interest rate markets reflected the highly uncertain economic outlook. The RBA responded to the pandemic by: cutting the cash rate target to 0.25 per cent; setting a three‑year Treasury Bond yield target at the same (cash rate) level; purchasing government bonds (AGS and semi‑government bonds) to address the dislocation observed in these markets; and introducing measures designed to lower funding costs and support the supply of credit across the economy through the banking and financial sector. The 10‑year and 30‑year benchmark yields ended the financial year at 0.88 and 1.74 per cent respectively (near historic lows).
The average term to maturity of Treasury Bond issuance in 2019‑20 was 8.78 years4. The average tenor for July 2019 to February 2020 was 12.01 years (with $38.9 billion issued in this period), and 7.31 years for the period March to June 2020 ($89.3 billion issued).
Chart 8 shows how the issuance program benefitted from low interest rates, with an average yield on new issuance of 0.82 per cent5. The average issuance yield was 1.16 per cent from July 2019 to February 2020, and 0.66 per cent from March to June 2020.
Chart 9 shows the funding cost profile of the LTDP and the net outcome overall (i.e. the AGS portfolio net of assets) over the past decade. These profiles are compared to the cash rate and the 10‑year moving average of the 10‑year bond yield. With interest rates trending down, funding costs on the LTDP and for the net outcome have declined by 231 and 220 basis points respectively since 2010‑11. This compares to declines of 450 basis points in the cash rate target and 250 basis points in the 10 year average of the 10‑year bond rate over the same period. Given the largely fixed cost structure of the LTDP and for the net outcome, changes in funding costs lag changes in the cash rate (changing only when existing debt securities or assets mature or new securities are issued/investments made).
The structure and effective yield on the Treasury Bond portfolio as at 30 June 2020 is a product of issuance undertaken since the 2008‑09 fiscal year. Around 60 per cent of the current portfolio was issued in the last four financial years at average yields significantly below the portfolio average of around 2.5 per cent, as depicted in Chart 10.
Long-Term Debt Portfolio risk outcomes
The average term to maturity of the Treasury Bond portfolio shortened by 0.05 years to 7.39 years over 2019‑2020 (Chart 11). Duration was higher by 0.07 years (finishing at 6.67 years). The effective cost of funds for the Treasury Bond portfolio decreased from 2.99 to 2.93 per cent.6
The change in risk levels of the portfolio in terms of funding, refinancing and interest rate risk over time are demonstrated in Chart 12 below. The chart shows a steady decline in the short to medium‑term Treasury Bond refinancing task, measured as the proportion of the stock of Treasury Bonds on issue through time.7 At 30 June 2011 38 per cent and 58 per cent of bonds required refinancing over the next three and five year periods respectively; these shares have now fallen to 24 per cent and 39 per cent.
Chart 13 shows that more than half of all currently outstanding Treasury Bonds were issued with an original term to maturity of between nine and 12 years. Around three quarters of the portfolio was issued with an original term to maturity of nine years or longer. The predominance of longer term bonds in the portfolio is reflective of long‑dated issuance biases since the start of the decade. This has contributed considerably to investor diversity, reducing funding risk, and the potential for high volatility in future interest rate outcomes.
Inflation exposure outcomes
The strategy for the indexed bond proportion of the portfolio centres on providing sufficient supply to meet investor requirements while supporting liquidity and the continuing development of the market over time. Issuance of Treasury Indexed Bonds in 2019‑20 totalled $1.65 billion.
Real yields moved in line with nominal yields through the first half of 2019‑20. In March 2020 expectations for global growth and inflation were sharply lowered. The break‑even inflation curve, that is the difference between nominal and real yields, both fell (in line with a strong decline in nominal yields and a diminished inflation outlook) and steepened significantly. Break‑even inflation recovered during the last quarter of 2019‑20 and 10‑year break‑even inflation ended the financial year at 1.01 per cent.
Treasury Indexed Bonds comprised around 7 per cent of total term debt (nominal and indexed bonds) on issue as at 30 June 2020. This share declined in 2019‑20 as a result of the increased volume of nominal issuance since March.
The AOFM manages the daily cash balances of the Australian Government in the OPA.8 This is undertaken in a manner that ensures the government is able to meet its financial obligations as and when they fall due. Other objectives are to minimise the cost of funding and the carrying cost of holding cash balances (which centres on holding only balances assessed as prudent to cover forecast needs and contingencies, while investing excess balances at low or minimal risk). In minimising cost, the AOFM seeks to avoid use of the overdraft facility provided by the RBA.9
Approach to achieving the Aims
Achieving the cash management objective involves formulating, monitoring and regularly revising forecasts of government cash flows (revenue and outlays), and developing and implementing appropriate strategies for short‑term investments and debt issuance.
A precautionary asset balance is maintained to manage the forecasting risk associated with potentially large unexpected cash requirements (or shortfalls in revenue collections) and the funding risk associated with market constraints. The liquidity risks associated with large changes in cash requirements were amplified in the latter part of the year with the advent of the COVID‑19 pandemic and associated Government fiscal response. This has necessitated holding higher precautionary asset balances; this adjustment was achieved over the period April‑July by weekly issuance rates above that required for ‘just‑in‑time’ cash flow needs.
Cash balances not required at short notice were invested in term deposits at the RBA, with the magnitudes and tenors of the term deposits determined by the AOFM. The interest earned on term deposits is used to defray the cost of a precautionary cash buffer. Maturity dates of term deposits were selected to most efficiently finance net outflows. Interest rates for term deposits at the RBA reflect the rates earned by the RBA in its open market operations.
In the past Treasury Notes have primarily been issued to assist with management of within‑year funding requirements and as such are not typically viewed as a source of funding toward the Budget financing task. However, the volume on issue during 2019‑20 ranged from a low of $3 billion to a peak of $63 billion, which represented a significant upscaling in usage compared to prior years ($2.5 to $5.0 billion in 2018‑19). With the onset of the market dislocation of March the AOFM leaned heavily on shorter term Treasury Notes, particularly between March and June 2020. Treasury Notes served a dual role through this period. They were used for Budget financing purposes, and to contribute to building a precautionary buffer of liquid assets.
The task of meeting the government’s financial obligations as and when they fall due was met in full. The overdraft facility was utilised twice in 2019–20, consistent with the principles guiding the use of the facility.
During 2019–20, 484 term deposits were placed with the RBA. The stock of term deposits fluctuated according to a range of factors influencing cash portfolio management needs. The average yield obtained on term deposits during 2019–20 was 0.85 per cent, compared with 1.85 per cent in 2018–19. The decrease in average yield reflects the lower average level of short‑dated interest rates that prevailed during 2019–20.
A total of $89.9 billion of Treasury Notes were issued in 2019–20 (in face value terms) an increase of $76.4 billion on 2018‑19. The average coverage ratio at tenders was 3.96, a decrease from 4.61 in 2018–19. Yields were on average around 20 basis points higher than Overnight Indexed Swap (OIS) rates for corresponding tenors (compared to around 35 basis points higher than OIS rates in 2018–19). This reflected the lower spreads across Australian short‑dated funding rates. Details are available in Part 5 of this report.
The movement in total short‑term financial asset holdings managed by the AOFM (OPA cash balance plus term deposits with the RBA), together with the volume of Treasury Notes on issue during 2019–20 are shown in Chart 15.
The AOFM was required to adhere to a set of cash management principles that: required balances in the OPA to be sufficient to meet government operational needs without being excessive; and use of the RBA overdraft facility to be unplanned, infrequent and in general only to cover unexpected events (due to timing or quantum or both). The average OPA balance for the year was $2.351 billion.
Consistent and regular market engagement assists the AOFM in achieving its core goals. In order to meet those goals the AOFM maintains a comprehensive understanding of market related issues including: changing global circumstances; major government announcements and policies; influences on the global flow of capital; changing investor preferences; and the performance of intermediaries — particularly in the primary AGS market.
The AOFMs investor and intermediary engagement continues to place a strong emphasis on maintaining regular lines of communication with these stakeholders. This is done directly with bank intermediaries and with investors, and indirectly, with investors through feedback from the banks and via the AOFM website. Ongoing engagement assists greatly in understanding how investors are viewing the market, how demand for AGS might be changing, and how intermediaries interact with and deal with investors. Frequent liaison provides the AOFM with the up‑to‑date assessments it needs to effectively and efficiently execute the issuance program through its related weekly decisions.
Approach to achieving the aims
Communication with intermediaries and investors remains a business‑as‑usual activity and, with investors, is based on an investor relations program. The investor engagement program is year specific and is underpinned by a strategy that is reviewed annually in response to changes in market conditions, investor activity, notable changes to the investor base, and the AOFM issuance strategy.
The Investor Relations strategy has three themes:
collecting and analysing market intelligence;
managing and maintaining updates to planned AOFM operations; and
focusing on engagement with new or potentially new investors.
Up to MYEFO and into the early part of 2020, investor engagement was underpinned by communicating AOFM plans to manage the forecast ongoing reduction in issuance.
Prior to February 2020, contact with investors involved the usual methods of engagement. These included face to face meetings (domestically and offshore), presenting at conferences and roundtables, and phone and video conferencing. A regular ‘Investor Insights’ series (providing an AOFM perspective on issues central to the AGS market) was initiated in May 2019.
However, from mid‑March (in response to the severe market dislocation) the AOFM quickly switched to daily calls to intermediaries and investors to help it in understanding what the impact on issuance from the market disruption could be. In early April (and immediately following the Government’s pandemic fiscal response announcements) an investor update briefing was out together as the basis of an impromptu round of briefings (more detail below). The initial effects of the lead‑up to the spread of the pandemic on investor engagement related activities lead to a cessation of all travel. This included cancellation by the AOFM of an overseas investor trip to Europe and the UK that had been planned for March. It also involved cancellations of all regular investor conferences and events held in Australia that the AOFM would annually participate in. Postponement of the May Budget meant the annual Australia Business Economists (ABE) speech, presented by the CEO was postponed to late July and was conducted by webinar. It remains an important opportunity to give guidance on the planned approach by AOFM to a range of operational issues that investors use to factor into their views for engaging with the AGS market.
In the first half of the year, 69 face to face meetings were conducted with domestic and Asian investors. Meetings were conducted on two occasions with different groups of domestic investors. The first set of meetings were conducted with those investors that typically buy short‑dated securities (and specifically Treasury Notes). The second group of meetings was the AOFMs standard annual domestic investor meetings. They were held with 21 domestic investors mainly in Sydney and Melbourne.
Phone and video conference calls were also made to 36 major offshore primary investors over 4 weeks in August and September; they were located in 21 cities from 17 different countries.
Asian investors were met face‑to‑face on two occasions via a North Asian trip to Japan China, Korea and Taiwan in November. An ADB Central Bank, Reserve Management conference in Singapore was presented to and 8 investor meetings were also conducted.
Based on the format of the annual primary investor calls, the AOFM conducted a modified version of this approach during the period of market volatility in mid‑April to early May 2020. Investors were provided with guidance on initial estimates of the fiscal response to the pandemic and how the AOFM was planning to manage the sharp uplift in issuance ahead. It was also an opportunity to for investors to ask questions (mostly about any clarity that could be provided on the RBA’s market interventions) and for them to share their views. The ability to speak to a wide range of investors individually and in a compressed time frame was valuable to the AOFM and well received and appreciated by investors. It allowed the AOFM to form reasonably reliable assessments of how global funding markets were recovering.
During this program 77 phone and video calls were delivered and relevant feedback was received. The calls were conducted with a wide range investor types from 17 different countries. It included institutions that normally would only be met face to face, such as the 26 domestic investors. The number and diversity of this group across geography and type, provided useful insight and market intelligence.
As well as face‑to‑face meetings and phone and video conferencing, the AOFM continued regular engagement with international and domestic investors throughout the year as and when they directly approached the AOFM o raise specific issues.
Regular fortnightly calls with 10 domestic Treasury Indexed Bond investors assisted in the selection of individual lines to tender. Regular calls were also commenced during the March and April disruption with another group of large investors in Treasury Bonds and Treasury Notes given the significance of the raid and large change in AOFM’s issuance of the latter.
Two international publication round tables were participated in. The first in January was a part of an annual event that brings the AOFM together with the state government borrowing authorities. The second roundtable conducted late in the year was done via teleconference.
Table 5: Summary of investor relations activities in 2019 20
Conferences, speaking engagements and investor roadshows
Presentations: large engagements/ roundtables
3 presentations (1 large presentation, 2 round tables)
Approximate total audience size: large presentations
Individual investor meetings
Individual investor Tele/ Video Calls
64 investor meetings
Individual cities visited
AOFM staff participating in investor relation activities
CEO, Head of Investor Relations, Head Funding & Liquidity, Senior Analyst, Investor Relations, Communications Officer, Investor Relations, Senior Analyst Funding and Liquidity, Analyst Funding and liquidity
ANZ, Citi Commonwealth Bank of Australia, Deutsche Bank UBS, Westpac
Establishing the Structured Finance Support Fund
On 19 March 2020, the Government announced the establishment of a $15 billion fund, the SFSF, to enable eligible smaller lenders to access finance via investments in structured finance products such as residential and commercial mortgage backed securities (RMBS, CMBS), asset backed securities (ABS) and securities issued by revolving warehouse finance facilities.
The SFSF enabling legislation was introduced to parliament and passed on 23 March and received royal assent on 24 March. The Treasurer issued supporting instruments (Rules, Delegations and Directions) setting out the AOFM’s mandate on 26 March. This section sets out how the AOFM has approached the task of establishing the SFSF as a vehicle to achieve the Government’s objective of maintaining access to finance for Non‑ADI lenders and ADIs that are unable to access the RBA’s Term Funding Facility (TFF) using self‑securitised assets as collateral.
Approach to achieving the aim
The legislation, Rules and Directions set out the eligibility requirements and provide guidance to the delegate (the CEO of the AOFM) on investment prioritisation. Importantly, the delegate must aim to receive a positive return on each investment after expected credit losses are taken into consideration. In addition, the Directions require the delegate to place a high priority on investments that catalyse rather than displace private sector investment.
The AOFM has identified three distinct priorities for the SFSF:
Maintaining access to primary (term) securitisation markets for Non‑ADI lenders across all collateral types (RMBS, CMBS and ABS);
Maintaining eligible smaller lenders’ access to finance via supporting revolving warehouse facilities; and
Supporting the establishment of a mechanism that will assist eligible smaller lenders to provide forbearance to their client base.
Maintaining access to primary funding markets provides confidence to Non‑ADI lenders that they can continue to originate new loans, and provides confidence to their warehouse financiers that the natural exit strategy to their investments remains open. A dual approach has been taken to keeping primary markets open: undertaking direct investment in term transactions to fill gaps as required; and providing third party investors the capacity to ‘switch’ out of existing investments to recycle the proceeds into primary market transactions.
The warehouse finance market experienced significant disruption, with some senior financiers restricting lending to existing clients and in some cases seeking additional credit enhancement at a time when mezzanine financiers10 have been unwilling or unable to increase their commitments, or have exercised their option to withdraw finance at the earliest opportunity. Consistent with the Directions, the SFSF investments have been used to fill gaps in these facilities, typically but not exclusively within mezzanine tranches, consistent with the objective of maximising the extent to which private sector investment is retained.
The third limb to the AOFM’s SFSF activities has been to work with industry via the Australian Securitisation Forum (ASF) to establish a ‘forbearance special purpose vehicle’ (fSPV). This will allow participating lenders to maintain an income stream from loans that have been granted a payment holiday due to COVID‑19 related hardship. The fSPV is intended to mitigate yield strain, buffer returns on securitisation trusts and support participating originators’ income flows. Support is to be provided retrospectively from 1 March 2020 to 31 March 2021 and will cover 90 per cent of missed interest payments on loans that are in COVID‑19 hardship.
From April 2021, participating originators will be required to start repaying drawn amounts from excess spread. Consistent with the SFSF Rules, the SFSF is to be the senior financier and will not hold the ‘first loss’ securities issued by the fSPV.
The first SFSF investment was made by the AOFM in a primary market transaction that priced on 27 March 2020. Primary market activity abated in April but picked up again in May. Non‑ADI term securitisation issuance steadily improved through the remainder of the financial year. In all, nine Non‑ADI primary transactions were supported by the SFSF between March and June, with a total issuance volume of $6 billion. The following table sets out the level of support provided by the AOFM through SFSF investments in each, decomposed into direct investment and secondary market ‘switch’ purchases. As can be seen, transactions supported by the SFSF were able to attract around four times the volume of SFSF investment from the private sector. To place this in context, the AOFM’s investments in RMBS during the Global Financial Crisis averaged around 77 per cent of primary market volumes for the first nine months of the program.11
Table 6: Analysis of Primary Market Support
Deal volume ($)
27 March 2020
8 May 2020
12 May 2020
27 May 2020
Resimac Premier 2020-2
5 June 2020
10 June 2020
Pepper PRS 26
17 June 2020
18 June 2020
RedZed STC 2020-1
30 June 2020
Sapphire XXIII 2020-1
Total / average:
The AOFM publishes details of its primary and secondary market investments in a timely manner to support the price discovery process.12 By 30 June, the AOFM had noted that conditions had improved within the term securitisation market and liquidity was less of a concern to traditional investors in this asset class, but pricing in Non‑ADI RMBS had not improved to the same extent as it had for RMBS sponsored by ADIs, most likely due to the lack of issuance of the latter, given the ability of ADIs to access relatively cheap sources of finance such as the TFF. The outstanding balance of term securitisations held by the SFSF stood at around $1.2 billion as at 30 June 2020, of which around three quarters is rated AAA by one of the major ratings agencies and 99.7 per cent has an investment grade credit rating.
The first warehouse investment by the SFSF was announced on 2 April 2020. This is expected to be a temporary investment in a warehouse sponsored by Judo Bank with co‑investment from the ABSF.13 By 30 June 2020 the delegate had provided in‑principle approval to SFSF investment in 24 warehouses sponsored by 18 originators with a total SFSF investment limit of around $1.5 billion.14 The total capacity of these warehouses is $12.4 billion, suggesting that over seven dollars of private sector investment has been retained for every dollar of SFSF commitment. As at 30 June, 16 warehouse agreements had been executed and the drawn amount of SFSF investment stood at around $594 million. The majority of these warehouse investments are unrated.
By 30 June, the AOFM was close to finalising the documentation and other requirements for the establishment of the fSPV. BNY Mellon was selected as trustee, trust manager and security trustee and the procurement of a collateral verification agent and standby trustee were close to completion. The AOFM expects the originator on‑boarding process to commence in July 2020, with investments following shortly thereafter.
Establishing the Australian Business Securitisation Fund (ABSF)
In November 2018, the Government announced plans to establish the ABSF to increase competition within the small and medium enterprise (SME) lending market by improving access to securitisation for smaller SME lenders.
The ABSF’s enabling legislation was passed by parliament in April 2019 and the first tranche of $250 million (of a total of $2 billion) was credited to the ABSF’s special account on 1 July 2019. This section sets out how the AOFM has approached the task of establishing the ABSF as a vehicle to achieve the Government’s objective of opening securitisation markets to SME lenders.
Approach to achieving the aim
Following the Government’s announcement of the ABSF, the AOFM and Treasury undertook extensive market engagement to gain insights into the SME lending market and to ascertain whether there were barriers to investment activity that might explain the underrepresentation of SME loans within collateral pools supporting Australian securitisation products.
A potential barrier that emerged from the consultations was a lack of standardisation in arrangements that support securitisation of SME loans. Examples included a lack of standard documentation of revolving warehouse finance facilities, and the absence of a standardised SME loan performance reporting template. Other features that emerged were the lack of homogeneity in lending products offered to SMEs and a lack of scale within specialist lenders that constrained their ability to price loans at close to the marginal risk‑adjusted cost of delivery.
The AOFM’s efforts have been focused on the establishment of a track record for various types of SME lending. In time, it is expected that such a track record would support ratings agencies and investors, attract new capital and provide for an expansion in the existing collateral types underpinning the Australian asset backed securities (ABS) market to include new types of SME lending.
Key to the ABSF establishment has been working with industry to define a suitably broad data template that, once populated, will form the basis for the recording of this SME loan performance track record. The Australian Securitisation Forum (ASF) supported the initiative by establishing a working group to undertake this work. The working group comprised industry‑wide representation including from trustees, data analytics firms, rating agencies, originators and investors.
In parallel with this work, the AOFM has indicated that it will seek to use the ABSF’s ability to invest with subsidy to offset the costs to participating lenders of updating systems to adequately capture loan level data in a manner that is consistent with the reporting template.
The ASF working group had made significant progress towards the design of a loan level template for SME lending when activity was temporarily suspended in March 2020 due to the onset of the COVID‑19 pandemic.
During the course of 2019‑20 the AOFM also laid the foundations for the ABSF investment management task. These included setting out investment guidelines, hiring specialist staff and procuring the services of an investment management firm to undertake credit analysis and due diligence on shortlisted investment proposals. The first call for investment proposals was released in December 2019. Following extensive assessment and due diligence, the AOFM announced in April 2020 that the ABSF’s initial allocation of $250 million would be allocated to an investment in securities issued by a warehouse facility sponsored by Judo Bank, an SME specialist lender. The documentation process was finalised in June 2020 and the first draw on the facility was made late in that month, such that the ABSF’s investment stood at $14.7 million on 30 June 2020.
The AOFM will monitor market conditions, call for a second round of investment proposals and re‑engage with the ASF working group as circumstances allow.
Debt servicing cost includes net interest expense (measured on an accruals basis and includes realised gains and losses on the disposal of assets or liabilities) plus foreign exchange revaluation gains and losses (now minimal). Unrealised changes in the market valuation of domestic debt and assets are not part of this measure.↩
The term premium is the additional yield demanded by investors in order to hold a long term bond instead of a series of shorter term bonds.↩
Refinancing risk, also referred to as rollover risk or re pricing risk, is the risk that borrowing to replace maturing debt occurs on unfavourable terms (or perhaps not at all).↩
These are point in time measures as at 30 June each year, in contrast to the debt servicing cost incurred throughout the year captured in Table 3. Figures are calculated by weighting Treasury Bond issuance yields by book volume.↩
In absolute dollar terms, the quantum of three and five year maturities in the portfolio has still grown although this has occurred at a considerably slower pace than growth in the overall stock of Treasury Bonds.↩
The OPA is the collective term for the core bank accounts maintained at the RBA for Australian Government cash balance management.↩
The overdraft facility is more costly than equivalent short term borrowing (for example, issuance of Treasury Notes). The terms of the facility provide that it is to cover only temporary shortfalls of cash and is to be used infrequently and, only to cover unexpected events.↩
Mezzanine financiers are typically specialist credit investors who provide additional credit enhancement between the ‘skin in the game’ or ‘first loss’ equity investment retained by the (eligible small lender) originator and the senior note held by the warehouse provider (typically a bank).↩
The AOFM also highlights investments where it is the sole third party investor in a security and thus has influence over pricing. In its first two primary transactions, the AOFM was prepared to accept a lower than market return on its relatively senior (AAA rated) investments to provide a buffer within the underlying trust that would benefit other investors, the originator and ultimately their borrowers. In time it became clear that this level of ongoing support was not required, particularly as progress was being made towards implementation of the fSPV.↩
The arranger of this transaction has been granted an option to replace the SFSF as A1 note investor by December 2020.↩
This excludes one warehouse for which the proposal was withdrawn after delegate approval.↩