The AOFM manages the Australian Government’s borrowing and financing needs and ensures that there is enough money in the Official Public Account (OPA) to meet the Government’s payment obligations at all times. These roles are referred to as debt management and cash management.
The Government’s payment obligations are varied and include public spending, investments, and repaying debt. When tax receipts are not going to be sufficient in any year to meet the Government’s payment obligations (a Budget deficit), the AOFM borrows money from investors through global financial markets (see “How does the AOFM borrow money?” below).
Within the year, the AOFM ensures that the Government’s bank account has enough cash to meet its daily needs. To do this, the AOFM tracks the timing and amount of Government cash flows. This includes tax receipts, Government spending (including transfers to the states), and debt repayments (for past borrowing). Spending obligations are continuous whereas tax receipts are periodic, which means they do not match, requiring the AOFM to actively manage the OPA through building cash reserves and/or short-term borrowing. The AOFM borrows short term debt (up to a year but usually around 4-6 months) by issuing Treasury Notes (see “How does the AOFM borrow money?” below).
Interaction with other agencies
The Treasury publishes the Budget and Mid-Year Economic and Fiscal Outlook. These official documents contain forecasts of the Government’s revenue and spending requirements. The AOFM uses these forecast outcomes to plan how much money it needs to borrow in any financial year.
The AOFM forecasts daily Government cash flows using advice from other agencies (such as Defence and Health and Human Services). The Department of Finance, Australian Taxation Office, and Reserve Bank of Australia are also in regular contact with AOFM. They provide advice based on their knowledge of particular cash flows.
The AOFM is in regular contact with financial institutions, including banks and investors. More detail on these interactions is given below.
How does the AOFM borrow money?
Borrowing money on behalf of the Government involves dealing directly with financial markets. There are financial instruments called Bonds that the AOFM uses to borrow money. They involve a contract to borrow money at an agreed interest rate and repay it at a later date. When the AOFM initiates borrowing, this action is referred to as issuance. Bonds (as financial instruments) are traded openly in markets (not unlike company shares). The ease and cost of AOFM borrowing on behalf of the Government is dependent on a variety of factors but the willingness of investors to trade these bonds is an important factor. This is often considered an indication of market ‘liquidity’. More liquidity is preferred to less.
There are three different instruments the AOFM currently issues: Treasury Bonds, Treasury Indexed Bonds, and Treasury Notes. Treasury Bonds pay a fixed amount of interest (called a coupon) on a semi-annual basis until the bond ‘matures’ (ie is bought back by the AOFM for the original amount borrowed and cancelled). Treasury Indexed Bonds pay a quarterly coupon that is linked to inflation; at maturity the AOFM buys back the bond for the amount originally borrowed plus the effect of inflation over that time. Treasury Notes are short term instruments that do not pay interest; rather, the investor pays less for them at the time of issuance than they will receive back from the AOFM at maturity. Collectively, these instruments are referred to as Australian Government Securities (AGS).
The AOFM follows a weekly pattern of issuance (borrowing) details of which are publicly announced ahead of time.
How do these transactions work?
The AOFM deals only with Registered Bidders (banks which buy and sell large volumes of bonds in global financial markets) The investors buying bonds from these banks include superannuation and pension funds, central banks, insurers, hedge funds and other banks. They are located not only in Australia but around the world.
Most AOFM issuance is done by tender (competitive auction) which are run on an electronic trading platform called Yieldbroker. Registered bidders can submit bids for a particular amount at the price they are prepared to pay. Tenders run for 15 minutes. The AOFM borrows at the most competitive rate by ranking bids from most to least favourable.
Under specific circumstances large transactions are issued by syndication. This format involves the AOFM appointing a small panel of registered bidders to co-ordinate bids from investors around the world. Syndications typically take around 20-24 hours and the final amount and price of the bonds issued are determined by the AOFM on the basis of the offers received via the panel.
How does the AOFM decide what to issue?
The AOFM has discretion over certain decisions, such as the mix of long and short term debt and the mix of Treasury and Treasury Indexed Bonds. These decisions are collectively referred to as the issuance strategy. The AOFM aims for an outcome that balances the various risks and costs involved with different approaches.
The AOFM closely monitors financial market trends and events and liaises regularly with Registered Bidders and investors. In addition, the AOFM models a range of scenarios to test the robustness of its judgements under potentially different economic and financial outcomes.
For more information, see Operations, Governance and Structure, or Annual Reports.
Last updated: 24 April 2019