Issue 20 | AOFM Investor Insights | November 2026
Introduction
This edition of Investor Insights provides an update on the role of Treasury Notes in the AOFM’s funding operations and examines the factors influencing their supply and investor demand. Treasury Notes were last explored in Investor Insights Issue 2 in 2019.
Treasury Notes are short-term Australian Government Securities (AGS) with maturities of less than 12 months. They are issued at a discount to face value, with investors receiving the full face value at maturity. Issuance varies considerably throughout the year, reflecting the AOFM’s within-year financing requirements. The volume outstanding has fluctuated since 2020, but the AOFM aims to keep a minimum level outstanding of $25 billion.
Treasury Note issuance has increased in 2026–27, and the AOFM expects volumes outstanding to remain higher over the next few years than the levels generally observed since 2021.
This paper discusses:
- recent trends in Treasury Note issuance;
- the role of Treasury Notes in the AOFM’s liquidity management strategy;
- how the AOFM issues Treasury Notes; and
- trends in investor demand and holdings.
Trends in Treasury Note issuance
Chart 1 shows the volume of Treasury Notes outstanding since 2019. Issuance increased sharply following the Australian Government’s fiscal response to the COVID-19 pandemic, reaching around $80 billion in 2020, equivalent to approximately 10 per cent of total AGS outstanding at that point in time.
Volumes subsequently declined and remained relatively close to the AOFM’s $25 billion minimum level for several years, as cash balances were generally elevated and fiscal outcomes stronger than forecast.
More recently, Treasury Notes have played a greater role in managing within-year variations in financing requirements. Average Treasury Notes outstanding increased from approximately $30 billion in 2024–25 to around $39 billion in 2025–26 and are planned to increase further in 2026–27.
Chart 1. Treasury Notes on issue and share of total AGS
Managing within-year financing requirements
The Government’s financing requirements can vary substantially within the year, reflecting the timing of receipts and payments and large Treasury Bond maturities. This can result in significant fluctuations in the AOFM’s cash balance.
Treasury Notes provide flexibility to manage these movements, as issuance can be adjusted relatively quickly as financing requirements change. The AOFM sets its funding program so that, on average, the cash balance is funded through Treasury Notes rather than longer-term Treasury Bonds, which is expected to reduce the cost of carrying the cash balance over time.
Chart 2 illustrates this relationship. At times, the cash balance excluding Treasury Notes has been negative, indicating that Treasury Notes can temporarily fund part of the Government’s broader financing requirement before it is met through longer-term borrowing.
Chart 2. Treasury Notes on issue and AOFM cash balance
Introduction of the two-tier cash buffer
From 2026–27, the AOFM introduced a two-tier cash buffer, maintaining a $30 billion operating buffer, while allowing the cash balance to temporarily fall to between $15 billion and $30 billion for brief periods under normal operating conditions. This provides greater flexibility in managing within-year financing requirements and increases the role of Treasury Notes in short-term liquidity management, while Treasury Bonds remain the primary instrument for longer-term funding.
How the AOFM issues Treasury Notes
Treasury Notes are issued through competitive tenders to Registered Bidders each week, usually on Thursdays, with settlement the following day. Details of forthcoming tenders and tender results are published on the AOFM website.
Consistent with their greater role, average weekly issuance of Treasury Notes has increased in 2026–27 to its highest level since 2020–21. As a guide, the AOFM expects issuance to generally range between $2 billion and $6 billion per week.
Periods of higher issuance also tend to involve a greater range of maturities. The AOFM selects maturities primarily to align with expected cash flow requirements, while also considering market conditions and investor preferences, rather than targeting particular tenors. Most Treasury Notes are initially issued with maturities of around three to six months, although shorter- and longer-dated maturities are also used.
Chart 3 shows that, as at 30 October 2026, there were 11 Treasury Note lines outstanding, with the longest maturity at around 8 months. There is no formal cap on individual maturity sizes, although the AOFM generally spreads issuance to avoid unnecessarily large refinancing concentrations. An individual maturity would therefore be unlikely to grow beyond $15 billion.
Chart 3. Treasury Note lines by maturity
The increased role of Treasury Notes has resulted in both higher weekly issuance and a broader range of maturities. An important consideration is the capacity of the market to absorb this additional supply. The following section considers how investor demand has responded.
Trends in Investor demand
One of the clearest measures of demand for Treasury Notes is the performance of the AOFM’s weekly tenders.
Chart 4 shows that tender coverage ratios have increased over the past year. In the first quarter of 2026–27, coverage ratios averaged more than four times, higher than the previous year despite significantly greater issuance. This suggests investor demand has comfortably kept pace with increased supply.
Chart 4. Coverage ratio and tender spreads by quarter
Treasury Note tenders typically price around 3–5 basis points above OIS across most tenors. Spreads to BBSW vary more by maturity, reflecting the shape of the BBSW curve. Longer-dated Treasury Notes, particularly beyond three months, typically price below BBSW, while spreads are narrower at shorter maturities.
The relatively narrow spread between 3-month OIS and BBSW in recent years has supported the relative value of shorter-dated Treasury Notes for investors that benchmark against bank bill rates. As Chart 5 shows, this spread has generally been relatively narrow since 2020. Nevertheless, demand has remained strong across both shorter- and longer-dated Treasury Notes.
Chart 5. 3-month OIS and BBSW rates
Trading and secondary-market liquidity
The AOFM publishes a list of key Treasury Note market makers and intermediaries on its website. These institutions are generally among the most active participants in the primary market and are therefore the most likely to facilitate secondary-market trading.
Primary-market participation differs from Treasury Bond tenders. Trading accounts typically receive less than half of Treasury Note allocations, with the majority allocated to client orders submitted through bank sales desks or directly to bank balance sheet investors. By contrast, close to 100 per cent of Treasury Bond tender allocations are typically made to trading accounts.
Investors generally report that Treasury Notes are relatively easy to sell but can, at times, be more difficult to source, particularly where individual maturities are tightly held. Experience demonstrates, however, that secondary-market turnover tends to increase as the volume of Treasury Notes outstanding grows.
In July 2026, the AOFM also added Treasury Notes to its securities lending facility. While the facility has only been accessed a relatively small number of times, traders report that its availability provides greater confidence to short a line, particularly where that line is also being tendered.
Trends in holders of Treasury Notes
The AOFM does not have a complete picture of the ultimate holders of Treasury Notes, but Austraclear data provide useful information on holdings and trends over time.
Chart 6 shows that, as at 30 September 2026, Authorised Deposit Taking Institutions (ADIs) held around 70 per cent of Treasury Notes outstanding, with domestic banks accounting for the largest share. Nominee and custodian accounts represent the next largest category, with a more modest share held by accounts identified as official institutions. Holdings can vary significantly over time given the short maturity of Treasury Notes and the frequency with which individual lines mature.
Chart 6. Categories of Treasury Note holders identified in Austraclear
Main investor types
ADIs
ADIs participate in the Treasury Note market through both trading accounts and bank balance sheets. While trading accounts are active in both primary issuance and secondary-market trading, much of this stock is subsequently sold to investors, meaning end holdings are considerably larger on bank balance sheets. Bank balance sheets have represented the largest source of demand over the past year, including the largest domestic banks as well as smaller banks and credit unions. Treasury Notes qualify as High Quality Liquid Assets (HQLA), and their short maturity makes them a flexible and relatively low-cost way of managing liquidity requirements.
Superannuation Funds
Superannuation funds generally hold only a small share of their liquid assets in Treasury Notes. Performance benchmarks for cash portfolios are typically linked to bank bill rates, which can favour bank and other short-term credit securities that offer a higher yield than Treasury Notes.
More broadly, APRA has increased its focus on the measurement and management of liquidity risk within superannuation funds, including more detailed reporting on liquidity supply, demand and stressed liquidity [1]. This has not yet resulted in a material increase in Treasury Note holdings by super funds, but a greater focus on liquidity could support demand over time, given the high credit quality and liquidity characteristics of Treasury Notes.
Non-Resident investors
Non-residents currently hold a relatively small share of Treasury Notes outstanding, although Chart 7 shows they have been significant holders at various times.
Historically, foreign exchange reserve managers have been the largest identifiable group of offshore investors, holding Treasury Notes alongside Treasury Bonds as part of their AUD reserves. Offshore banks, pension funds and insurers also participate. Relative value, outright yields, the level of the Australian dollar and currency hedging costs are important considerations for offshore demand.
Recent feedback from investors and intermediaries suggests non-resident interest may be increasing. More broadly, offshore investors have increased allocations to AUD in the last year, which could support higher Treasury Note holdings.
Chart 7. Non-resident holdings of T-Notes
Outlook
Treasury Notes are expected to continue playing a greater role in the AOFM’s liquidity management over the next few years, with higher average volumes outstanding and a broader range of maturities than generally observed since 2021.
Investor demand has so far kept pace with increased supply, supported by a broadening investor base. Maintaining at least $25 billion of Treasury Notes on issue also provides investors with greater certainty around the ongoing presence of the market, helping support participation and demand.
[1] See APRA Information Paper System Risk Stress Test | APRA
