Third OECDChina Forum on Public Debt Management and Government Securities Markets

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Third OECD-China Forum on Public Debt Management
and Government Securities Markets
Adjusting the Annual Debt Management Strategy in
Australia

• Andrew Johnson
• Head of Compliance and Reporting
• Australian Office of Financial Management

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Debt Management Strategy

• Australias annual debt management strategy has
  two parts
• Debt issuance strategy Bond Programme
• Main risk factor for adjustment fiscal
  position
• Portfolio management strategy Interest Rate
  Swap Programme
• Main risk factor for adjustment interest rates

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Debt Issuance Strategy

• Adjustment of the debt issuance strategy occurs
  at three levels
• in response to evolving fiscal trends from year
  to year
• in response to changed but anticipated Budgetary
  circumstances within the year
• in response to unanticipated financing
  requirements

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Debt Issuance Strategy
Debt issuance strategy has had to adapt to a wide
range of sustained fiscal environments
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Debt Issuance Strategy
Debt issuance strategy has had to adapt to a wide
range of sustained fiscal environments
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Debt Issuance Strategy
Fiscal environments can cause large swings in
debt with implications for market viability
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Debt Issuance Strategy
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Debt Issuance Strategy
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Debt Issuance Strategy

• Objectives of strategy
• To fully fund the governments borrowing
  requirement
• To manage the refinancing risk of the debt
  portfolio
• To maintain the efficiency and viability of the
  governments key securities markets
• Particularly the bond futures market that prices
  off the securities market

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Debt Issuance Strategy

• Broad principles
• To meet budget deficits with long term debt
• Transparent with markets about our activities and
  strategy
• Do not destabilise financial markets through our
  debt management activities

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Debt Issuance Strategy

• Separation of debt management and monetary policy
• No central bank lending to government
• Debt issued at market yields through auction
  processes
• Ensure debt management does not provide signals
  or contagion for other arms of government policy
• Have a longer term outlook on our debt management
  activities
• Have a strategic rather than opportunistic
  approach
• Attempt to minimise costs over longer term rather
  than short term trading

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Debt Issuance Strategy

• Approval processes
• Bond Programme developed as part of the annual
  Budget process in May
• Approved by Treasurer
• Tied to budget financing needs and/or maintenance
  of the bond futures market
• Decisions on volume of bond issuance, composition
  of program including new bond lines

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Debt Issuance Strategy

• Communication of strategy
• Announced in Budget documents
• AOFM provides an annual presentation of strategy
  to market participants
• AOFM publishes an indicative bond issuance
  calendar on its website
• Auction dates, bond lines and volumes
• Adhere to this issuance calendar

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Debt Issuance Strategy

• Triggers for changing debt issuance plans
• Official fiscal forecasts can change at their mid
  year review
• Debt issuance programmes are revised if necessary
• Debt issuance programmes only change on the back
  of official forecasts
• Avoid any policy signalling about fiscal policy
• Unexpected fiscal events handled by cash
  management
• Interest rates are not a factor in debt issuance
  decisions

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Debt Issuance Strategy

• Debt issuance strategy needs to have flexibility
  to handle significant financing variations
• Considerable scope for fiscal projections to
  change
• Fiscal policy decisions but mainly economic
  drivers
• Considerable potential for financing requirements
  beyond that anticipated by fiscal projections

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Debt Issuance Strategy
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Debt Issuance Strategy

• Trade-off between predictability and flexibility
• The ability to be transparent, predictable in
  debt issuance depends upon
• predictability of financing requirements
• state of the fiscal cycle and the call on debt
  markets
• the capacity of cash management systems

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Debt Issuance Strategy

• Trade-off between predictability and flexibility
• In the past, Australia
• experienced sustained periods of fiscal deficit
  large financing requirements
• had significant, but limited ability to absorb
  fiscal surprises through Treasury Notes alone at
  a reasonable cost
• was required to build some flexibility into
  Treasury Bond Programme
• indicative volume range
• with a looser commitment to auction timing

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Debt Issuance Strategy

• Trade-off between predictability and flexibility
• Currently, Australia
• has fiscal surpluses no financing requirement
• has buffer of financial assets that assists in
  cash management that could also absorb unexpected
  fiscal surprises
• is specifically issuing debt to maintain market
  efficiency
• has the ability to provide a transparent,
  predictable annual issuance calendar for Treasury
  Bonds

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Portfolio Management Strategy

• Objectives of the strategy
• Reduce the cost of the debt portfolio subject to
  acceptable risk and government policies
• With debt issuance linked to meeting market
  efficiency objectives, interest rate swaps have
  become the instrument available to meet the cost
  objective

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Portfolio Management Strategy

• Broad principles
• Have a longer term outlook on our portfolio
  management activities
• Not trading on interest rate views
• Attempt to reduce costs over longer term
• Do not destabilise financial markets through our
  debt management activities
• Transparent with markets about our strategy

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Portfolio Management Strategy

• Approval processes
• The Portfolio Management Strategy is approved by
  the Secretary to the Treasury
• Seeks advice from an Advisory Board largely
  independent of AOFM

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Portfolio Management Strategy

• Elements of the Portfolio Management Strategy
• Policies for the management of the Balance Sheet,
  Interest Rate Risk, Liquidity and Credit Risk
• Sets up requirements for benchmarks, operational
  and policy limits for activities and reporting
• A long term benchmark portfolio target for
  interest rate risk
• Provides targets for interest rate risk
• Duration 2.50, short dated exposure of 35
• Reviewed annually

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Portfolio Management Strategy

• Annual Portfolio Strategy for the management of
  each of these risks
• A range for swap programme volumes, approved
  discretion for the AOFM CEO, receiving or paying
  and operational limits for interest rate, credit
  and liquidity risks
• AOFM CEO then approves a Swap Programme
• CEO directions to guide Treasury Services staff
  in the AOFM including discretion limits
• Regularly reviewed and CEO can change the Swap
  Programme through the year
• Within approved discretion of Annual Portfolio
  Strategy

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Portfolio Management Strategy

• Communication of strategy
• AOFM provides an annual presentation of strategy
  to market participants
• Covers long term benchmark and how it is driving
  our swap programme
• Covers broad range volume of swaps to receive
  fixed rates, swaps to pay fixed rates and broad
  tenor for each type
• Do not provide specific information on planned
  transactions
• risk of financial markets front running the AOFM

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Portfolio Management Strategy

• Triggers for changing strategy
• The main risk factor driving the Portfolio
  Management Strategy are interest rates
• We review our Portfolio Management Strategy at
  two levels
• Annually when we review of the long run
  benchmark
• In adjusting the Swap Programme during the year
  when circumstances warrant

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Portfolio Management Strategy

• The Portfolio Management Strategy is based on the
  benchmark which makes assumptions about yield
  curve term premia and volatility
• Affects the cost / risk trade-off of different
  duration debt portfolios
• Financial market conditions may depart from the
  assumptions behind the benchmark
• if viewed as temporary, it will affect the
  attractiveness of executing new transactions to
  remain at benchmark
• if viewed as continuing, may signal a need to
  revise the benchmark and Portfolio Management
  Strategy as well

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Portfolio Management Strategy

• Discretion in the implementation of the Swap
  Programme
• Do not undertake swaps where market conditions
  significantly different to assumptions
  underpinning the benchmark
• Do not follow the benchmark mechanically will
  depart
• However, biased towards reducing absolute risk
  when conditions are unfavourable
• not increasing risk when conditions are
  favourable

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Portfolio Management Strategy

• In particular we are cautious about
• swaps that increase risk where benefits less
  favourable than assumed by the benchmark or
• swaps that reduce risk at a significantly higher
  cost than assumed by the benchmark
• Believe that this approach is akin to identifying
  whether the market conditions are expensive
• distinctly different approach to taking a view
  that it will get cheaper at a later date

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Conclusion

• In Australia we
• believe there is merit in being predictable and
  transparent about the Bond Programme
• but ultimately there needs to be flexibility
  elsewhere, particularly in cash management, to
  facilitate this approach
• are more willing to use discretion and adjustment
  in portfolio management and the Swap Programme in
  seeking to reduce costs subject to acceptable
  risk