The AOFM manages the Australian Government’s borrowing needs (debt management) and ensures that there is enough money in its bank account (the Official Public Account) to meet its payment obligations at all times (cash management).
The government’s payment obligations include public spending, investments and repaying debt. When tax receipts are not expected to meet the government’s payment obligations in any year, the AOFM borrows money through global financial markets.
Within the year, the AOFM ensures that the government’s bank account has enough cash to meet its daily expenditures. To do this, the AOFM tracks the timing and amount of government cash flows, including tax receipts, spending (including transfers to the states) and debt repayments (for past borrowing). The timing of revenue inflows and spending outflows do not match, requiring the AOFM to actively manage this mismatch through building cash reserves and/or short-term borrowing.
Planning our activities
The Australian Government’s annual Budget and Mid-Year Economic and Fiscal Outlook contain official revenue and spending forecasts. The AOFM uses these forecasts to plan its annual borrowing programs.
The AOFM forecasts daily government cash flows using advice from other agencies. The Department of Finance, Australian Taxation Office and Reserve Bank of Australia are also in regular contact with the AOFM regarding their knowledge of particular cash flows.
How does the AOFM borrow money?
Borrowing money on behalf of the Commonwealth involves dealing directly with financial markets. The AOFM issues financial instruments called bonds. Investors from Australia and overseas pay for the bonds, in return for regular interest payments and the repayment of principal at a set date in the future. Bonds (as financial instruments) are traded in financial markets.
The AOFM currently issues three different instruments: Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. Collectively, these instruments are referred to as Australian Government Securities (AGS). Treasury Bonds pay a fixed amount of interest (called a coupon) twice each year until the bond ‘matures’. Treasury Indexed Bonds pay a quarterly coupon that is linked to inflation. Treasury Notes are short term instruments that do not pay interest; rather, the investor pays less for them than they will receive at maturity.
How do these transactions work?
The AOFM deals only with Registered Bidders (banks that buy and sell large volumes of bonds in global financial markets and have registered through contractual arrangements to participate in AOFM tenders). Investors including superannuation and pension funds, central banks, insurers, hedge funds and other banks buy bonds from (and sell bonds to) these banks.
Most AOFM issuance is done by tenders (competitive auctions) that are run on an electronic trading platform. Registered Bidders can submit bids for a particular amount of a bond at the price they are prepared to pay. Tenders run for 15 minutes. The AOFM allocates bonds up to the pre-advised volume to those bids at the highest prices (lowest yields) to enable borrowing at the lowest rate available at the time of the tender.
Under specific circumstances the AOFM issues bonds in large transactions called syndications. This involves the AOFM appointing a small panel of intermediaries to co-ordinate bids from investors around the world. Syndications typically take around 24 hours from start to finish and the final amount and price of the bonds issued are determined by the AOFM on the basis of the bids received via the panel of intermediaries.
How does the AOFM decide which securities to issue?
The AOFM sets an issuance strategy for each year. It is based on the mix of long-term and short-term debt and the mix of Treasury Bonds and Treasury Indexed Bonds. The AOFM aims for an outcome that balances the various risks and costs involved with different approaches under a range of possible financial market scenarios.
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 fiscal and economic related scenarios to test the robustness of its judgements under different financial market conditions.