Operations

The AOFM issues Australian Government Securities (AGS) on behalf of the Government to meet its financing requirements. Issuance at tender or by syndication as known as ‘primary’ market operations.

Early buy-backs of AGS are conducted to reduce the size of repayments at maturity and to enhance market liquidity. Buyback tenders are typically once per fortnight. Buy-backs may, at the discretion of the AOFM, be held concurrently with the launch of a new line by syndication or directly from the Reserve Bank of Australia (RBA). The RBA buys bonds as part of its liquidity operations and reports its holdings on its website [link].

The RBA operates a Securities Lending Facility on behalf of the AOFM for Treasury Bonds and Treasury Indexed Bonds when these bonds are not available from the market via other banks or from investors. This supports liquidity to the wholesale (secondary) AGS market.

Retail (small volume) investors can invest in AGS through a product on the Australian Securities Exchange (ASX). Retail investors are those who are not trading on behalf of an institution. Exchange-traded Treasury Bonds (eTBs) and exchange-traded Treasury Indexed Bonds (eTIBs) are electronically traded and settled through the ASX. For more information, please visit: https://www.australiangovernmentbonds.gov.au/.

Active issuance

Treasury

The interest rate is fixed and coupons are payable semi-annually. The face value of the bond is repayable at maturity. Maturities (or terms of borrowing) range out to 30 years.

Treasury Indexed Bonds

The capital value of these bonds is adjusted quarterly for movements in the Consumer Price Index (CPI). The interest rate is fixed and coupons are payable quarterly. Interest is calculated on the adjusted capital value. The adjusted capital value of the bond is repayable at maturity. Maturities range out to 30 years.

Treasury Notes

Short-term discount securities used for within-year financing. There are no coupons, however the face value repaid at maturity is higher than the price at which it is issued. The volume on issue varies depending on the within-year flows of government receipts and expenditures. Maturities can be as long as 12 months but typically range from 3 to 6 months.

Other operations

Buyback Tenders

This is a method of repurchasing outstanding debt securities through an auction-style tender. The amount and security to be repurchased are announced by the AOFM. Registered participants make offers to the AOFM that are accepted descending from the highest interest rate (and lowest price) until the buyback amount has been filled.

Cash Management

The Australian Government maintains a group of bank accounts known as the Official Public Account (OPA). The balance of the OPA represents the daily cash position. Cash proceeds not required for immediate purposes are invested in short-term assets. Current investment holdings are published as at the end of each month on the AOFM’s website (see Investments).

Securities lending facility

A facility established by the AOFM in 2004 to lend Treasury Bonds and Treasury Indexed Bonds to institutions. The facility is operated by the RBA on behalf of the AOFM. Registered bidders can pay to ‘borrow’ bonds for trading purposes that are otherwise not readily available by entering a repurchase agreement (repo) with the RBA. Cash is swapped for bonds for an agreed period and then the transaction is reversed. The facility supports the efficient functioning of the market.

Exchange-traded Treasury Bonds (eTBs) and Exchange-traded Treasury Indexed Bonds (eTIBs)

eTBs and eTIBs provide a way for retail investors to invest in Treasury Bonds and Treasury Indexed Bonds. eTBs and eTIBs are quoted and traded on the Australian Securities Exchange (ASX). An eTB or eTIB holder has beneficial (as opposed to legal) ownership of Treasury Bonds or Treasury Indexed Bonds in the form of CHESS Depositary Interests (CDIs). This means obtaining all the economic benefits (including coupon and principal payments) of the Treasury Bond or Treasury Indexed Bond over which the CDIs have been issued. A single unit holding of an eTB or eTIB provides beneficial ownership of $100 Face Value of the Treasury Bond or Treasury Indexed Bond over which it has been issued.

Historical instrument and activities

Australian Savings Bonds

Australian Savings Bonds (ASBs) were debt securities aimed at retail investors from 1976 until 1987. There were many series of ASBs, each with a different interest rate and maturity date (generally up to 7.5 years). The ASBs were issued ‘on tap’, as demanded by retail investors, and were available in banks and post offices. During this time, Australian financial markets were more regulated than today. Whenever interest rate policy settings changed, the existing ASB series would be replaced by a new series reflecting the new rate. Investors could redeem ASBs early without penalty after a minimum holding period by giving a month’s notice.

Bearer securities

A negotiable instrument, akin to cash, which evidences a payment obligation to be met on presentation at designated dates. The issuer of the instrument does not record the identity of the security holder, and the physical possession of the certificate is sufficient proof of ownership. The certificates for bonds issued as bearer securities normally carry detachable coupons. In the past, many Australian Government Securities (AGS) were issued in bearer form. Bearer securities have not been issued since 1984 (all securities now record the owner on a register).

Cross Currency Swaps

A cross-currency swap is a floating/floating swap where two parties borrow from – and simultaneously lend to – each other an equivalent amount of money denominated in two different currencies for a predefined period of time.

In 1988, a program of cross-currency swaps commenced to maintain a 10-15 per cent share of the Commonwealth’s debt portfolio in US dollars. In December 2000, the Treasurer initiated a review of this policy. In September 2001, the Treasurer endorsed the review’s conclusion to discontinue the policy. The AOFM then commenced a phased reduction of the foreign currency exposure in the Commonwealth debt portfolio to zero. By March 2004, all foreign currency derivative exposure had been eliminated from the portfolio.

Interest Indexed Bonds

Interest Indexed Bonds were a type of inflation-linked bond. Quarterly coupons were paid as a fixed real rate of interest rate plus an indexed amount applied to the face value of the bond. The indexed amount varied over time according to movements in the consumer price index (CPI). The bonds were repayable at face value on maturity. These bonds were issued between 1985 and 1988 and have all matured.

Interest rate swap

An agreement between two parties to swap interest payments. It usually involves one party exchanging a stream of fixed interest cash flows for a stream of floating interest cash flows. The AOFM undertook a program to unwind its existing interest rate swaps in 2008-09.

Overdue securities

Securities which have passed their maturity date, but have not been redeemed by stockholders. Overdue securities issued by the Australian Government are predominately Treasury Bonds, Australian Savings Bonds and War Savings Certificates. The Australian Government repays the amount due when the stock is presented for payment. No interest accrues on the stock following its maturity date.

Residential Mortgage-Backed Securities (RMBS)

A debt instrument issued by a special purpose vehicle to finance the securitisation of a pool of residential mortgages. A description of the principal features of a typical RMBS transaction can be found on pages 30-31 of the AOFM’s 2008-09 Annual Report.

Special Bond

Special Bonds were a retail instrument issued on tap with an original maturity of around 7.5 years. There were numerous series of Special Bonds, each with different interest rates and maturity dates. A feature of Special Bonds was that the interest rate paid to investors stepped up over time until the maturity date. The face value of the instrument repaid to investors increased over time to a maximum of 103 per cent of the par value. Special Bonds were issued between 1959 and 1976. They were the forerunner of the Australian Savings Bond.

Tax Free Stock (TFS)

Stock with no fixed date of maturity issued by the New South Wales, Victorian and South Australian Governments prior to 1 January 1924. Under the Financial Agreement Act 1994, Tax Free Stock is administered by the Australian Government on behalf of State governments.

Treasury Adjustable Rate Bond (TAB)

A medium-term debt security issued by the Australian Government from 1994 to 1997 that carried an interest rate adjusted quarterly in line with movements in the bank bill swap reference mid-rate, payable on the face value of the security. TABs were repayable at face value on maturity.

War Savings Certificates (WSC)

War Savings Certificates were securities issued by the Australian Government in bearer form to raise funds during both World Wars. The securities had maturities ranging from 3 to 10 years in the case of World War I, and 5 to 7 years in the case of World War II. Certificates were issued at a discount, with interest being incorporated in the face value of the certificate payable at maturity. All outstanding War Savings Certificates are now overdue securities.

 

Last updated: 24 April 2019