Analysis: AOFM Could Up Bond Lines Well Above A$30B, Hold Off Third Line Plan

(This story was first published on November 25 for paid subscribers, and is now being made freely available)

By Sophia Rodrigues

The Reserve Bank’s Quantitative Easing program could change the way the Australian Office of Financial Management looks at outstanding bond lines, making it likely it would raise the size of a bond line if it considers net of RBA holdings, instead of gross size.

This means the AOFM could potentially increase the size of bond lines that are over A$30 billion that it currently views as “large.” It also means the AOFM could put on hold its plan to introduce a third bond line in some calendar years.

On November 3, the RBA announced A$100 billion QE program which includes buying of A$80 billion of Australian government securities. The current program consists of purchases of A$4 billion of AGS every week of around 5-10 year maturities and in line with that the RBA is buying bonds maturing between November 2024 to May 2032.

The RBA’s bond-buying, along with the cut in three-year yield target, is aimed at lowering the whole structure of interest rates in Australia. This is because investors move towards the longer end of the curve in search for yield.

The bond-buying would lead to a total reduction of A$80 billion in outstanding bonds in the market.  It is very unlikely the RBA would end up buying equal amounts of all the 16 bond lines, but if we assume it does, it would lead to a A$5 billion fall in each bond line, net of RBA holdings.

This means there is potential for the largest bond line - May 2030 - to reduce to A$30 billion (net of RBA holdings) from the current outstanding A$35.4 billion, increasing the prospect of a reissue of this bond.

It also opens up reissue opportunities for bonds such as April 2025, April 2026, April 2027 November 2028, April 2029 and November 2029, that have outstanding of over A$30 billion, and net of RBA holdings have already dropped below A$30 billion.


In a speech on July 31, AOFM CEO Rob Nicholl discussed the possibility of a third bond line for the first time. He noted there were nine bond lines over A$30 billion on issue and it raised the question on how much larger they could get.

“An alternative is to introduce third within-year lines,” Nicholl said.

“There are several reasons for considering this. One is that large lines will add complexity to meeting bond maturities from a cash management perspective, not to mention the potential impact this may have on the RBA’s task of managing system liquidity.”

“Another reason is that marginal liquidity benefits are likely to dissipate after bond lines reach around A$30-35 billion.  Additional bond lines should also create new interest from investors,” he said.

In a post-budget update in October, the AOFM provided further clarity on this when it said that in January it would announce plans for new bonds which “may include selectively adding a third maturity in some calendar years.”