AOFM’s Nicholl Says Won’t Pursue Third Bond Line In Foreseeable Future

By Sophia Rodrigues

(Sydney, June 8, 2021) – The Reserve Bank of Australia’s bond-buying program has no direct bearing on the Australian Office of Financial Management’s issuance decisions but its impact on market liquidity means it won’t pursue establishment of a new third maturity in some years in the foreseeable future.

AOFM’s Chief Executive Officer Rob Nicholl made the comments on Tuesday in a speech delivered to the Australian Business Economists on the topic, “Last Year: Not just one to remember, but one to learn from.”

Last year, Nicholl had flagged the possibility of a third bond line.

“While we haven’t completely abandoned this option, we don’t intend pursuing this in the foreseeable future,” he said.

This is because issuance is forecast to decline over the coming years, and because of the impact of the RBA’s bond buying program on individual bond lines.

The AOFM views individual bond line sizes for the purposes of market liquidity not as the gross outstanding amount but the amount net of what the RBA holds.

Nicholl gave the example of the November 2028 line which has A$31 billion gross outstanding of which the RBA holds A$17 billion, indicating a ‘free float’ of A$14 billion.

“A lot of this line has presumably been offered to the RBA because it is relatively less valuable to investors than other lines. However, re-emerging demand will be a signal for us to tap it again,” he said.

There are other ways RBA’s bond-buying is influencing AOFM’s operations. For example, the AOFM has suspended buying back short-dated bonds directly from the market or the RBA and this will continue until the end of 2021-22 at least.

The AOFM has also decided not to issue into bond lines that form part of the RBA’s three-year yield target policy.

“We don’t rely on this part of the curve to achieve our borrowing requirements and to issue into these lines at present could create the impression that AOFM issuance was in direct conflict with a specific monetary policy aim. This is confusion we can easily avoid creating,” Nicholl said.

On the announcement on issuance program, Nicholl said it has decided to step back from the more “prescriptive guidance” given in the past.

This means details about planned new maturities will now be announced in two stages -- in early July, and again when issuance resumes in January after the Christmas break.

The AOFM will continue with the practice of announcing a planned gross issuance program at the federal budget for the year ahead, and will continue to provide updates at MYEFO and the following budget.

The AOFM will also refrain from providing expected weekly issuance rates to give it more flexibility.

The decision draw on the AOFM’s experience in the past when in its attempts to keep the market readily informed, it reduced its own flexibility.

It “left us feeling hemmed in at times when better than forecast budget performance created unplanned strength in the cash position. As it turned out, this left us with having announced materially higher weekly issuance rates than required,” he said.

On Treasury Notes, the AOFM remains of the view that it will play an important role into this and next year, and that it will not provide guidance on its issuance.

But Nicholl revealed that its overall issuance program has been planned to accommodate a floor in Treasury Notes outstanding which will be in the vicinity of the current level. This means there would be at least A$25 billion T-Notes outstanding at all times.

“The important thing to note, however, is that our planning requires a variation in issuance rates throughout the year and to meet changes in the cash cycle,” Nicholl said.

On linkers, Nicholl said that a new in-fill maturity around the 10-year part of the curve is under consideration.

“Should that proceed for the 2021-22 year it would be sensible to assume establishment by syndication and increasing gross issuance above the A$2.5 billion already allocated for regular tenders.”

Nicholl did not provide outlook for syndication of bonds in the coming year.

One outstanding decision for the AOFM is how many bond lines are required between the 2041 and the 2047 bonds to round out support with infill maturities for the 20-year futures contract.

Nicholl said it will be a 2043 or 2044 bond and which of the two it opts for would determine whether the maturity is established in the coming year or the following year.