Australia Note Ylds At New Low; Should AOFM Consider Refining Bid Format?

By Sophia Rodrigues

Yields at Australia’s Treasury Note tenders fell to a new record low on Thursday as investors are forced to bid competitively for a slice of short-term AAA paper, given the alternative is to park funds with the Reserve Bank at zero interest rates.

The yield on the shorter-maturity March 26, 2021 Note fell to 0.0173% compared with 0.0247% at the tender a week ago for similar maturity. The yield on the July 23, 2021 Note fell to 0.0273% versus 0.0371% a week earlier.

There was a 1bp drop in the successful bid range this week compared to last week, with range for March Note being 1-2bps, and the 2-3bps for the July Note.

Yields at AOFM’s weekly Note tenders have been falling since August, with ample liquidity driving the initial decline and later followed by expectations of cuts in the Reserve Bank’s interest rates.

The RBA’s cash rate target is at 0.1% now but the cash rate is around 0.05%.

However, the more important interest rate is the rate the RBA pays on excess balances in the Exchange Settlement account which is zero.

Given low demand to lend in the overnight or short-term market, including repos, banks have to contend with zero rate on their huge excess balances. The AOFM Note tenders offers some opportunity to invest at a positive rate but the tender size is too small to fill the market demand. Investors, therefore, must bid aggressively to succeed.


With tender yields now very close to zero, the AOFM should once again revisit the bid format for Note tenders.

In August, the AOFM revised the yield bid format to a maximum of four decimal places from two allowed previously, but only in whole multiple of 0.0050%.

The AOFM should consider removing the 0.0050% multiple rule and give investors the choice of making aggressive bids.

The AOFM could also use the opportunity to tighten bid format at bond tenders. Currently it allows maximum of four decimal places but with a whole multiple of 0.0025%. It could remove the 0.0025% multiple rule for this too.