Transcript: Interview with Australian Office of Financial Management’s Anna Hughes on 20 January

21 January 2025

By Marta Vilar – MADRID (Econostream) - Following is the full transcript of the interview conducted by Econostream on January 20 with Anna Hughes, CEO of the Australian Office of Financial Management.

Q: On the issuance program update you published on December 19 you revised up the issuance of Treasury Bonds expected for 2024-25. Why was that?

A: AOFM’s issuance volumes consider the Budget financing task as well as an assessment of appropriate asset balances. The AOFM may also look to smooth issuance across financial years. Based on this we increased the planned issuance of Treasury Bonds for 2024-25 from $90 billion to $95 billion.

Q: Why were the Indexed Bond tenders moved from Tuesdays to Thursdays each week?

A: The issuance calendar is very busy and with monthly CPI becoming more important for the market we are testing if issuing on Thursdays will allow us to be more consistent/predictable with our Treasury Indexed Bond tender weeks (as it avoids conflicts with the RBA and monthly CPI). We will review this decision prior to the 2025-26 program update.

Q: Would you say your strategy for the remainder of 2024-25 is more predetermined or opportunistic?

A: AOFM establishes an annual strategy prior to the beginning of each financial year which may provide targets such as a weighted average maturity (WAM) of issuance. We aim to operate consistently with the strategy but maintain flexibility with week-to-week issuance decisions so we can to respond to market dynamics.

Q: Will it stay that way in 2025-26?

A: Yes, that is the expectation.

Q: Given that there is an election due by May 2025, if more or less spending is announced, are you prepared to issue more in the 2024-25 year to pre-fund 2025-26 spending and to smooth issuance amounts between fiscal years?

A: AOFM works flexibly in our issuance activities to respond to government financing requirements. We expect to update the market on our issuance intentions following the Budget. We also update the market on an ad-hoc basis if we feel it is necessary. Smoothing issuance across financial years is something AOFM considers.

Q: Which part of the curve is gaining more attention and demand from investors now?

A: The bulk of investor demand remains in the most liquid 3- and 10-year parts of the yield curve. Higher yields in the ultra-long part of the curve (out to 30 years) are attractive for many investors, however the investor base in this part of the curve is mostly offshore and is smaller than for more liquid, shorter tenors.

Q: Are you looking to change the mix between the issuance of short-term debt (Treasury Notes) and long-term debt (bonds)? Are you happy with your current weighted average maturity?

A: Treasury Notes (or T-Notes) have been maintained around the floor level of $25 billion for a few years. Partly as Budget outcomes have been to the upside. However, we do intend to use T-Notes more actively for cash management purposes so you can expect T-Notes on issue to increase over time.

Our issuance WAM in 2023-24 was around 12.5 years. So far this year our issuance is averaging slightly less than 9 years. Our portfolio WAM is around 6.5 years. Our annual strategy considers the cost and risk (including refinancing risk) of various issuance choices, including the WAM of issuance (and how that flows into the portfolio WAM).

Q: Do you envision the AOFM extending its maximum maturity beyond the current 30 years?

A: We have no current plans to issue longer than 30 years. We do plan on maintaining our curve around 30 years and we will look to do this when the 2054 rolls down to around 28 years.

Q: At the 2023-2024 Annual Report you sounded satisfied about the improved pricing of the 30-year maturity issuances as a spread to the 10-yr Treasury Bond. Do you think there is still room to improve the pricing further?

A: We take careful consideration of market dynamics (including investor demand) when making issuance decisions to achieve favourable pricing, however, we are by nature a ‘price-taker’, therefore pricing is subject to market conditions.

Q: In June 2024 Australia joined the club of sovereigns that have issued green bonds. Were you happy with the investor community reaction?

A: We were pleased overall by the reception from the investor community. Prior to the launch of the deal, we undertook a roadshow to speak to investors about the green bond framework and plans for the syndicated issue. Investors were highly engaged during the roadshow, which we believe supported demand for the bond. Investors bid for more than 3 times the $7 billion available volume at the first issue. The transaction was particularly well supported by domestic investors, who were allocated 65% of the issue.

Although the proportion allocated to European investors was the highest for any AOFM 10-year bond issue, we were somewhat disappointed by the offshore support given our extensive engagement. The most common reason for investors declining to participate in the deal was the price of the bond.

Q: You completed this green bond issuance in June with a greenium. Do you expect to maintain this greenium in upcoming green bond issuances?

A: We estimated a greenium of around 2bpfor our first green bond issue. This greenium has contracted since then – the green bond trades at around the same yield level as other Treasury Bonds. As with all our issuance, the AOFM is a price-taker.

It is important to remember that the purpose of the green bond program is not to attract a greenium. The program enables investors to back Australian climate and environmental projects and will attract green capital to Australia.

Q: Do you plan to tender only for this June 2034 green bond line that you issued in June 2024 for the remainder of 2024-25?

A: We will issue around $2 billion of the June 2034 green bond line through tenders this financial year. We have held two $300 million tenders so far and the results have been solid – investors can expect similar-sized tenders moving forward.

The next new green bond will be issued by syndication in a year or two.

Q: Do you intend to build this line to a big enough size that it could enter the futures bond basket?

A: Our first green bond will grow with regular tender issuance, but not as large as the benchmark Treasury Bonds that underlie futures contracts. Investors recommended that rather than concentrating issuance into one maturity, we should build a curve of green bond lines over time. Consistent with this approach, $2 billion of issuance this year is significantly less than the size of the pool of eligible expenditure, to retain capacity for the launch of the next new line.

I would also note that for the effective operation of the futures market, basket bonds should be representative of the Treasury Bond market generally. Green Treasury Bonds are not ideal basket candidates because they may trade differently from other bonds, in terms of price and liquidity. For example, at times our green bonds will trade at a ‘greenium’. We also know that sections of our green bond investor base are ‘buy and hold’ investors. This is great for demand and the stability of the market but will tend to reduce liquidity at the margin.

Q: In the latest Annual Report, you also said you were also working to launch exchange-traded Green Treasury Bonds for retail investors on the Australian Securities Exchange in 2025. How far ahead are you in this project and when do you expect to launch it?

A: We are still planning to make exchange-traded Green Treasury Bonds available for retail investors by the end of 2025.

Launching any retail investment product can be challenging. A labelled green bond for retail investors comes with additional work and risks to manage. We are particularly focussed on greenwashing risk.

There are no Australian dollar-denominated green bonds available to retail investors, so we can’t learn from the experience of other issuers. Hopefully we can blaze a trail for other issuers to follow, as part of the development of Australia’s labelled bond market.

Q: Some other sovereign issuers, like Germany, have abandoned inflation-linked bonds as of last year. The AOFM still issues these and expects an issuance of $3 billion for 2024-25, with 1 or 2 tenders each month. Do you envision the AOFM abandoning inflation-linked bonds anytime soon?

A: The AOFM has no plans to exit the inflation market. Treasury Index Bonds are a relatively small portion of our issuance and portfolio. We are monitoring the activity of our peers regarding issuance.

We are looking at the TIB market in advance of monthly CPI and whether we should adopt a more internationally consistent formula.

Q: Your latest issuance update shows one syndication at the end of Q1 2025 for the March 2036 bond. When could we expect a late 2036 bond syndication announcement?

A: We will update the market with future issuance plans in due course (next update is planned post Budget, noting the Budget may be delayed by an election so there may be something ad-hoc or a post the Pre-election Economic and Fiscal Outlook update).

Q: One of your current goals is to expand your investor base. Which nationalities are you willing to increase?

A: The Australian Government Securities (AGS) market attracts a diverse range of investors from various geographical regions and sectors. Currently, non-resident investors hold approximately 46% of AGS on issue. The offshore investor base includes investors from Asia (excluding Japan), the UK, Europe, the Americas, and Japan. We regularly engage with investors from all major regions.

Q: Are you happy with the spread of investors from banks, hedge funds, SWFs, CBs, etc?

A: The AOFM does not aim for a specific composition of investors since AGS are traded freely in competitive markets. We regularly engage with a wide range of investors and issue AGS in a manner that appeals to as many investors as possible. For instance, different investor groups may focus on different segments of the Treasury Bond curve, or they might have an interest in Treasury Notes or Treasury Indexed Bonds. A diverse investor base is beneficial because it enhances liquidity in the AGS market and reduces the likelihood that a majority of investors will respond similarly to market events.

Q: What do you make of your share of retail investors? Are you willing to increase it?

A: Direct holdings of AGS by retail investors account for a very small percentage of total outstanding bonds, less than 0.1%. Retail investors are more significantly exposed indirectly to AGS through managed funds, including superannuation funds, where fund managers invest in AGS on behalf of retail investors. The AOFM regularly engages with domestic and international fund managers and occasionally financial advisory groups that serve retail investors. However, the AOFM does not engage directly with retail investors themselves.

Q: Are you planning any innovation on this or other respect?

A: There are no specific innovations planned for retail investors other than the plans to make exchange-traded Green Treasury Bonds available for retail investors by the end of 2025 as outlined above.