Auction procedures and price discovery mechanisms for Australian Government Treasury Bonds

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Auction procedures and price discovery
mechanisms for Australian Government Treasury
Bonds

• Gerald DodgsonHead of Treasury Services

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Australian Government Treasury Bonds

• Fixed coupons paid semi-annually in arrears.
• Issued for terms of up to 13 years.
• Redeemable at face value on maturity.
• Not issued for budget funding purposes - issued
  to support Treasury Bond futures market and
  market for interest rate risk management in
  Australia.

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Australian Government Debt
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Treasury Bonds Outstanding Year 1
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Treasury Bonds Outstanding Year 2
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Auction arrangements for Australian Government
Treasury Bonds
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Auction Process

• Legal authority to issue Treasury Bonds delegated
  to AOFM officials.
• Treasurer (Minister) approves annual Treasury
  Bond issue programme.
• Treasury Bond issuance calendar (12 month
  calendar) auctions confirmed one business day
  prior to scheduled auction date.
• Bloomberg Auction System electronic auction
  system accessed via BLOOMBERG PROFESSIONAL
  Service.

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Auction Bidders

• Parties that wish to participate in auctions of
  Australian Government debt securities need to
  sign a Registered Bidder Agreement with the
  AOFM.
• Fifteen institutions are currently registered to
  participate in auctions all are major financial
  institutions.
• Reserve Bank of Australia is able to lodge
  non-competitive bids bonds issued at weighted
  average issue yield.

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Bid Lodgement

• Thirty minute bid lodgement period (11.45 am to
  12.15 pm).
• Bids entered as face value amount and yield.
• Individual bidders permitted to bid for the total
  amount of bonds offered.
• Automatic checks to minimise erroneous bid entry.
• AOFM can monitor on real-time basis bids lodged.

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Auction Finalisation

• Bids accepted in order of ascending yield.
• AOFM officials are authorised to accept auction
  bids.
• Auction results are announced as soon as possible
  generally within one minute of expiry time for
  lodgement of bids.
• Settlement of accepted bids occurs two business
  days after the auction. Settlement is undertaken
  on behalf of the AOFM by the Reserve Bank of
  Australia.

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Price discovery mechanisms for Australian
Government Treasury Bonds
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Treasury Bond Price-Makers

• Self appointed group of financial institutions
  currently 11 Treasury Bond price-makers.
• Price-makers agree to provide bid-offer markets
  to each other.
• Standard market parcel is A10 million (equal to
  US 8 million) face value with a 2 basis point
  bid-offer spread.
• No special privileges for price-makers.

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Methods of Dealing

• Telephone dealing.
• Fixed interest brokers screens are only
  viewable to price-makers and have executable
  quotes. There are currently 3 inter-bank brokers
  of Treasury Bonds.
• Electronic trading platforms.
• - Bloomberg Bond Trader
• - Yieldbroker (domestic based web-based system)

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Methods of Quoting

• Outright A yield on a semi-annual to maturity
  basis at which a dealer is willing to buy or sell
  the bond.
• Switch Where a dealer is prepared to buy one
  bond and sell another. Generally quoted in terms
  of the difference between the yields of the two
  bonds.
• EFP Stands for Exchange of Futures for
  Physicals. EFP is the key method of quoting.

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Treasury Bond Futures Market

• The Treasury Bond futures market is the key
  market for bond market price discovery in
  Australia.
• - 3-year Treasury Bond futures contract
• - 10-year Treasury Bond futures contract
• The Treasury Bond futures market is highly traded
  and very liquid.
• - Annual bond futures turnover is around 65
  times the volume of outstanding Treasury Bonds
• - Annual physical bond turnover is around 6
  times the volume of outstanding Treasury Bonds.

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Exchange of Futures for Physicals (EFP)

• Each Treasury Bond trades at a yield spread to
  either the 3-year or 10-year Treasury Bond
  futures contract.
• EFP works by two counterparties striking a deal
  to trade bonds and agreeing to swap an agreed
  number of relevant Treasury Bond futures
  contracts such that the trade is interest rate
  risk neutral for both parties.
• The number of futures contracts exchanged is a
  function of the ratio of the Present Value of a
  Basis Point (PVBP) of the bonds to the PVBP of
  the relevant bond futures contract..