Statement 7: Asset and Liability Management (continued)
In the 2011‑12 Budget, the Government reaffirmed that its primary objective for the future of the Commonwealth Government Securities (CGS) market is to maintain liquidity to support the three‑ and ten‑year bond futures market. The experience of the global financial crisis underscored the value in maintaining a liquid and efficient CGS market of sufficient size to support the long‑term stability of the financial markets.
In considering the future of the CGS market, including the size needed to ensure liquidity, the Government's deliberations were informed by discussion with a panel of financial market participants and financial regulators. The panel considered the impact of the global financial crisis, the new global liquidity standards and the changing composition of the CGS investor base on the CGS market.
Since the 2011‑12 Budget there have been significant developments in world financial markets that have had implications for the CGS market, in particular the growing demand from international investors for Australian dollar denominated securities, including CGS, against a backdrop of global economic volatility and persistently weak sovereign balance sheets in many other advanced economies.
The strength of Australia's economy and public finances, which is reinforced by the Government returning the budget to surplus, stands in stark contrast to many other sovereigns facing a significant task of generating growth and placing public finances on a sustainable footing. Australia is one of only eight countries to have a AAA credit rating with a stable outlook from all three major rating agencies.
Since the last Budget, a number of factors have influenced the fall in yields on bonds of all maturities (see Box 3). The benchmark borrowing rate for the 10‑year Treasury Bond has fallen to some of the lowest levels in Australia's history.
Box 3: Increased demand for Australia's sovereign debt
In the year since the last Budget, CGS yields have fallen substantially across the yield curve, (Chart A) resulting in lower borrowing rates for the Government.
The movement in the Australian yield curve reflects a range of factors. The weak and fragile global economy has put downward pressure on benchmark global long‑term bond yields. This weak global economy has also driven investors into high quality government debt. As a result, Australia is reaping the benefits of a deep and liquid AAA‑rated CGS market, increasing the diversity of the buyers of government debt. Shorter‑term bond yields have also moved, primarily owing to the changed stance of monetary policy.
As a result of this fall in yields, the market value of CGS outstanding has increased while the face value is not affected.
Chart A: Yield curve for Treasury Bonds
Note: Yields are indicative mid‑rates of CGS. Data for the 2011‑12 Budget and 2012‑13 Budget refer to yields on 10 May 2011 and on 1 May 2012 respectively.
CGS on issue subject to the current legislative limit is projected to be below $250 billion at the end of each financial year across the forward estimates. The volume of CGS on issue at various times throughout the year is projected to exceed this level due to within‑year fluctuations of CGS on issue. Within‑year fluctuations of CGS on issue are a normal feature of the annual financing task.
The two key drivers of within‑year fluctuations of CGS on issue are: the difference in timing between Government outlays and revenue collections throughout the financial year; and the timing of bond maturities. Treasury Note issuance is the most efficient and effective means of managing within‑year financing requirements.
Government payments occur relatively evenly across the financial year whereas tax collections in the last quarter of the financial year tend to be higher than in other quarters. As a consequence year‑to‑date expenditure exceeds year‑to‑date receipts for the majority of the year. The Australian Office of Financial Management (AOFM) manages this timing difference principally by issuing Treasury Notes.
In advance of bond lines maturing, the AOFM accumulates sufficient funds, including through Treasury Note issuance, to repay these bonds. This means that in the lead up to the maturity of a bond line there is a temporary increase in the amount of total CGS on issue owing to the combined value of the Treasury Notes and the maturing bond on issue. The volume of CGS on issue falls on the maturity date of the bond by the face value amount of that bond.
To ensure flexibility in meeting the Government's objective of maintaining a deep and liquid CGS market, and to manage most efficiently the normal within‑year financing task, an amendment will be sought to the Commonwealth Inscribed Stock Act 1911 to increase the legislative limit on CGS to $300 billion.
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