Objective 1: securing coverage of the issuance programme
The primary objective of Agence France Trésor is to ensure the security of the State’s financing transactions. The security of auctions can be measured by comparing the volume of bids to the amount auctioned. For this purpose, OATs and BTANs should be distinguished from BTFs, which on average show higher bid-to-cover ratios (Indicator 1.2).
In forecasts, the thresholds set for bid-to-cover ratios are in line with the levels at which the market deems that an auction is well-covered.
All of Agence France Trésor’s auctions were covered in 2010. On medium- and long-term securities (OATs and BTANs), the average bid-to-cover ratio stood at 214%, slightly up on 2009. The lowest bid-to-cover ratio was 153%, recorded in April 2010.
The average bid-to-cover ratio for BTFs rose from 248% in 2009 to 280% in 2010. The lowest bid-to-cover ratio observed for a BTF auction in 2010 was 172% at the end of June 2010.
The adjustment to the State issuance strategy, mainly through the reopening of old bond issues and an increase in the number of lines at each auction, maintained the security of auctions throughout 2010.
Objective 2: Improving bond debt management choices
AFT must meet the State’s borrowing needs and follow the auction schedule over the fiscal year. This means that AFT must make choices as to the pace of programme implementation over the year and the selection of maturities issued on a given auction day. Its objective is to implement these choices as efficiently as possible. To measure efficiency, AFT calculates the following two indicators.
• THE TIMING INDICATOR compares the results obtained with the actual issuance policy to the results that would have been obtained by implementing the issuance programme in a linear fashion each day. The actual results are therefore compared to those of an automated system that would issue a constant volume of the full range of maturities each trading day so that, by the end of the year, it had issued the same outstanding amount of each maturity as AFT under its issuance policy. In this case, any positive or negative differences in AFT’s actual performance revealed by the indicator would stem from its timing choices, as well as from the fact that auctions are held on predetermined dates for operational reasons.
• THE ALLOCATION INDICATOR compares AFT’s actual strategy to the strategy set out in the line-by-line issuance programme that AFT proposes at the beginning of the year. The indicator compares the differences in the end-of-year value of the portfolio of securities actually issued and the value of the portfolio set out in the programme as originally announced. Both portfolios would have been issued at the same dates, but they would contain different proportions of the various maturities. The indicator measures the consistency of AFT’s choices in response to primary dealers’ advice and the specific market conditions that caused AFT to deviate from its original programme.
Both of the control systems reflect the specific results associated with one of the two parameters left up to AFT’s judgment: the distribution of the overall issuance volume over time and the selection of maturities issued at each auction. The differences between the performance of the actual issuance and the simulated issuance of each maturity are measured at market value for both indicators in order to integrate both the resulting interest savings and expected future interest savings.
The performances for each product and each maturity are then expressed in comparison to a simulated 10-year benchmark rate in order to facilitate interpretation of the various results. The latter are expressed in 10-year equivalent basis points. A plus sign (+) indicates that AFT performed less well than the control systems. These simulations incorporate conventional mediumterm and long-term bonds, as well as inflation-linked bonds. However, BTFs, which are issued in a virtually linear manner, with very regular volumes each week, are not covered.
It should be noted that AFT has very little room for manoeuvre in practice. It has to issue a given volume of securities and its action must be predictable in order to avoid taking the market by surprise. This means that in practice it cannot aim at large fluctuations around the simulated control results. Furthermore, the market reacts to changes in supply and demand and anticipates them. This means that the yield of a bond starts to rise as soon as an issue is announced. Consequently, a strategy that is passive, with linear issuance or issuance according to a preset programme for the year, is bound to perform less well than the control system. This factor is not picked up when calculating the system’s performance. These characteristics must be kept in mind when interpreting the targets and the results.
TIMING INDICATOR: a differential of +5 basis points obtained in 2010 means that the agency’s programme deviated by only +0.05% from the average cost of borrowing - in 10 year equivalent, i.e. reflected in 10-year debt only - of the benchmark programme (debt calculation made by a “robot” on a straight-line basis every day). This performance falls within the ±10-basispoint target range for the indicator, which means that the yields obtained at the auctions are a good reflection of general interest-rate developments over the year.
ALLOCATION INDICATOR: A differential of - 3.5 10-year equivalent basis points means that the programme implemented by Agence France Trésor deviated by only -0.035% from the 10-year equivalent control programme of normative issuance following a predetermined pattern. This result suggests that adapting the initially planned programme during the course of the year generated a gain to the State of 0.035% in 10-year equivalent. However, it would not be appropriate to consider a gain as being more desirable than a loss in relation to the programme, the aim being to minimise the absolute difference in order to ensure that AFT remains predictable.
Timing indicator: issuance of 10-year OATs The chart opposite shows how the distribution of issues in periods of the year when yields were highest resulted in a positive value for the timing indicator.
MAJ : 09 2011