RDP 2025-07: Back to the Futures: Liquidity in Australian Bond Futures amid Market-moving Events since COVID-19 6. Conclusion

We examine tick-level data on Australian Government bond futures over the period of October 2019 to June 2025. We find that AGS futures were very liquid from mid-2020 to early 2021, when the market's expectations for future interest rates were aligned with the RBA's yield target. Conversely, liquidity deteriorated at the onset of COVID-19 and around the end of the yield target in late 2021, and remained low through 2022 and into 2023 as market participants reassessed their views of the outlook for the cash rate. Measures of liquidity improved through 2024 and early 2025, to be broadly in line with levels seen in late 2019 before the COVID-19 pandemic.

Turning to regular market-moving events, we find a clear distinction between uncertain news events and pre-announced and known flow events. Uncertain news events – including announcements of the RBA's monetary policy decisions, major ABS data releases, and AGS syndication announcements – lead to higher turnover but worse liquidity conditions: market participants actively trade on the news and adjust their portfolios, but at the same time are less willing to provide liquidity to others, and trades move futures prices by more than usual. Pre-announced and known flow events – including AGS syndications, which typically involve the sale of $10 to $15 billion worth of a bond, as well as smaller flows such as RBA purchases and AOFM tenders – improve liquidity by serving as a focal point that brings investors to the market. Conversely, the futures roll period sees liquidity deteriorate, as focus and resources shift away from the outright futures market to the roll market and some market makers scale down their liquidity provision. Finally, an increase in the minimum price increment for the 3-year contract, implemented by the ASX in October 2022 to try to improve liquidity conditions, appears to have been successful, with various indicators of liquidity improving after the change.

The AGS market is a key market for the implementation of the RBA's monetary policy decisions, so it is important that the RBA has a deep understanding of that market, how liquid it is – and indeed what ‘liquid’ means – and how various measures of liquidity respond to major events. By studying liquidity in the AGS futures market in detail we further this understanding. This should assist with, most importantly, the design of any market operations in the future that might involve outright transactions in AGS, should such operations prove necessary. It should also strengthen the RBA's ability to interpret and extract relevant signals from the AGS market in order to better inform policy decisions.