Many investors underestimate the size of the fixed income market. Globally, bonds account for nearly…
Commonwealth Government Bonds (CGS) are medium to long term debt issued by the Treasury through the Australian Office of Financial Management (AOFM). These securities pay a fixed coupon semi-annual in arrears, which are redeemable at face value on the specified maturity date and are the most liquid fixed income security in the Australian. Bonds issued by the Commonwealth Government are considered a key benchmark when measuring relative yields on other fixed income securities and this helps set pricing.
Australian Government bonds are available to investors through the ASX in the form of Exchange Traded Treasury Bonds (eTBs). One unit of an eTB provides the holder with beneficial ownership of $100 Face Value of Treasury Bonds in the form of a CHESS Depositary Interest (CDI). This enables the holder to receive coupon Payments each six months and principal repayment at maturity from the Treasury Bond over which the CDI has been issued. All CGS/eTB issues are supported by the Commonwealth Government Consolidated Revenue Fund.
The Reserve Bank of Australia (RBA) maintains the Commonwealth Inscribed Stock Registry and bondholders within this registry eight days prior to the coupon interest payment date (the record date) are entitled to the interest payment. This is referred to as the ex-interest date and if securities are traded within the eight date, the new bondholder is not entitled to the upcoming interest payment.
CGS yields are highly correlated with market expectations of the future RBA cash rate and other global factors such as other sovereign bond yields and foreign monetary policy.
Figure 1. Historical Commonwealth Government Securities Outstanding
Due to the Federal Government’s ability to raise taxes and print money, CGSs are considered to be a risk-free investment and are authorised by the Commonwealth Inscribed Stock Act 1911. According to the act, principal and interest of CGSs are guaranteed by the Commonwealth’s Consolidated Revenue Fund and authority is granted to the present treasurer of the Commonwealth of Australia regarding future issuance of CGSs.