The Australian Office of Financial Management said it generated gains of around $1 billion from its decision to unwind its portfolio of interest rate swaps. AOFM made the decision to do so in mid 2008 and began to do so under a program beginning in November 2008, a month or two into the worst phase of the financial crisis.The annual report of the AOFM, published yesterday, said it unwound 131 swaps with a notional face value of $15.4 billion. This included 12 swaps "that were unwound in response to adjustments to credit ratings or other credit-related events", which might suggest exposure to bailed-out financial institutions.At end-June 2009, the portfolio contained 21 remaining swaps with a notional face value of $2.4 billion. These are all due to mature by mid-May 2010.Under the AOFM's new strategy, "the duration of the nominal debt portfolio is determined by the cumulative effect of issuance decisions," the annual report said.In practice, this means selling Commonwealth government bonds in lines that support the baskets for the three-year and 10-year bond futures contracts.This means the duration, or effective life, of the Australian government's debt portfolio has tended to decline towards four years as the legacy swaps matured.The AOFM said the cost of funds of servicing the gross debt managed over 2008/09 was 4.39 per cent, compared with 6.55 per cent the previous year. Most of this is due to realising the gains from the swaps portfolio rather than the decline in yields on term debt.The yield on assets in the portfolio was 5.36 per cent in 2008/09, compared with 6.75 per cent the previous year. Meanwhile the AOFM noted that it has had to take mark-to-market losses on its investment in $6 billion in residential mortgage-backed securities as of June 2009, given the direction to invest in this class of security in a manner designed to provide funding to a struggling set of mortgage providers. AOFM could have bought $6 billion in RMBS in the secondary market at higher yields.