Neglected and capable of funding most of the deficit, Treasury Notes have a future in AOFM funding plans, at least well into next year.
“An ability to rely on the cash market in a time of crisis was an important observation” from the pandemic period, Rob Nicholl, CEO of the AOFM told a webinar yesterday.
“Since the Treasury Note market was reopened during the GFC our reliance on it has waxed and waned, depending on various considerations that have been covered in past speeches,” Nicholls said.
“In the absence of a specific vision for this market, just keeping it open for a time of crisis has become the default, regardless of whether it was relied on regularly in the meantime. This is because in periods of severe stress we expect investors to retreat to positions of high liquidity, while at the same time avoiding duration risk.
“A corollary to this is that Treasury Notes will offer the safety of cash, but with a marginally better return.
“Throughout the turmoil of March and April the Treasury Note market indeed remained open and the continued strength of weekly tenders indicates why we have been able to lean on it to the extent we have. The result of course has been a sharp run-up in the volume outstanding.
“To gauge some perspective on these changes the volume outstanding as of today is A$64 billion while at MYEFO we were expecting a peak for 2019-20 of around $20 billion.”
Nicholl told Australian Business Economists “the increase in volume outstanding still has some way to run but we are not releasing estimates because they will continue to change, and because we need to retain operational flexibility.
“Publicly locking in the overall mix of financing will take that flexibility away.
“Treasury Notes will continue to play an important role throughout this year and well into next year at the very least. This is because the size of the funding tasks ahead mean that it will be next year at the earliest before we can noticeably begin to refinance Treasury Note volumes through bond issuance.”
And not even then.
“Clearly, support for demand will still be required to lock in a declining unemployment rate,” Steven Kennedy, Secretary to the Treasury, told the Senate’s Select Committee on COVID-19 yesterday.
JobSeeker and JobKeeper “act as automatic stabilisers, that is, they flex in response in the size of the shock,” Kennedy told the Senate.
“Given the uncertainty that emerged in late March and remains with us, this automatic element is important and a deliberate design feature of JobKeeper, and one of the reasons for the enhanced JobSeeker.
“Naturally, this also means the costs of these programs can be significantly more or less than anticipated given the capacity for the effects of COVID-19 to swing substantially.”
Not all of this income transfer will be spent immediately by businesses and households, the Treasury secretary pointed out.
“We are likely to see the household saving ratio rise to around 20 per cent in the June quarter reflecting both precautionary behaviour and forced savings,” Kennedy said.
“This transfer of money from