RDP 2025-07: Back to the Futures: Liquidity in Australian Bond Futures amid Market-moving Events since COVID-19 1. Introduction

This paper uses tick-level data from the Australian Government Securities (AGS) futures market between 2019 and 2025 to develop a better understanding of that market.^[1] In particular, we study the liquidity of the AGS futures market and the impact of market-moving events on its liquidity. These events include: the introduction and the removal of the RBA's yield target; the RBA's regular monetary policy decisions; bond purchases by the RBA as part of its bond purchase program; bond issuance by the Australian Office of Financial Management (AOFM); major economic data releases by the Australian Bureau of Statistics (ABS); futures ‘rolls’, which occur leading up to the quarterly expiry dates for futures contracts; and changes in the minimum price increment that futures can trade in.

Understanding the AGS futures market and how it reacts to major market-moving events is important because AGS – that is, bonds issued by the Australian Government – constitute a critical fixed income securities market in Australia. AGS are considered to be free of credit risk and the AGS market is deep and liquid, and reflecting this the yields on AGS act as a benchmark for the pricing of other fixed income securities in Australia. AGS also play a key role in monetary policy transmission, both in terms of how the RBA implements monetary policy (which involves the purchase of AGS, either outright or under repurchase agreement) and in terms of transmitting changes in the RBA's operational target – the cash rate – to longer-term interest rates, broader financial conditions, and ultimately economic activity and inflation.

AGS futures provide a convenient way to gain exposure to AGS, without having to either fund and hold the underlying bond (for a long position) or borrow and then short sell the underlying bond (for a short position). As is the case with many types of derivatives, turnover in AGS futures contracts, at the equivalent of around $20–40 billion face value per day, is many times higher than turnover in the underlying bonds themselves, at around $5 billion per day (Figure 1).^[2] Reflecting this, price discovery for AGS often occurs in the futures market rather than the underlying AGS market, and as such AGS futures are a key instrument for taking on, or hedging, interest rate risk in Australia.^[3]

Futures prices and AGS yields are closely linked by arbitrage relationships. Futures contracts expire on a three-month cycle, and at expiry the futures contract pays 100 minus the average yield on the basket of AGS that the futures contract references (typically three to five bonds of similar maturity). AGS futures contracts are settled via a transfer of cash, rather than the transfer of an underlying bond. This cash settlement of futures contracts is different to many other countries, most notably the United States, where futures are settled via the delivery of a bond. Before expiry, deviations of futures prices from AGS yields (adjusted for the cost of transacting in and funding any outright bond positions) represent an arbitrage opportunity, since investors know that at expiry the futures contract will pay out (100 minus) the average bond yield. Given this, investors trade on, and so minimise, price deviations between futures and bonds. The most liquid futures contracts in Australia are the 3-year and 10-year contracts, which reference AGS with residual maturity of close to 3 years and 10 years, respectively. There are also 5-year and 20-year futures contracts, but they are less widely traded than the 3-year and 10-year contracts and we do not consider them in our analysis.

In the remainder of this paper we review relevant literature (Section 2); describe our data in more detail and perform some preliminary analysis (Section 3); review some periods of interest since COVID-19 through the prism of futures market liquidity (Section 4); and estimate the impact on futures market liquidity of various events including RBA policy announcements and bond purchases, data releases, AOFM bond sales, the futures roll period, and changes in the minimum price increment that futures contracts can trade in (Section 5). Section 6 concludes.

To preview our results briefly, we find that:

• Liquidity in the AGS futures market deteriorated at the onset of COVID-19 and around the end of the RBA's yield target. Market depth and price impact seem to be more informative as measures of liquidity for AGS futures than bid-offer spreads, which can be unresponsive to poor liquidity, and turnover, which responds ambiguously to poor liquidity.
• Regular news events, including RBA policy decisions and major ABS data releases, tend to lead to higher turnover but somewhat worse liquidity conditions. As these events contain an element of uncertainty, market participants actively trade on the news and adjust their portfolios. However, during these events, market participants are less willing to be providers of liquidity to others by offering to buy or sell futures at the current prevailing price, which results in a decrease in the number of buy and sell orders at the best bid and ask (that is, depth falls at the top of the order book), and executed trades seem to move futures prices by more than otherwise.
• Large flow events such as AOFM bond syndications, which are known in advance and typically involve the sale of $10 to $15 billion worth of a bond, improve liquidity by serving as a focal point that brings investors to the market. Smaller flow events such as RBA bond purchases and AOFM bond tenders, which are also known in advance and are typically in the order of around $1 billion in size, also improve liquidity.
• Conversely, the futures roll periods that occur at quarterly expiry dates see liquidity deteriorate, as focus and resources shift away from the outright futures market to the roll market, though the recent delinking of the outright and roll markets seems to have reduced the extent of the deterioration.
• Finally, an increase in the minimum price increment for the 3-year contract, implemented in October 2022 by the Australian Securities Exchange (ASX) to try to improve liquidity conditions, seems to have been successful, with various liquidity metrics improving after the change.

Footnotes

Market participants sometimes use the term ‘Treasury bond futures’ rather than ‘AGS futures’; we use the latter term in this paper to make explicit that we are discussing futures for Australian government bonds, since many countries issue ‘Treasury bonds’. [1]

Turnover in AGS futures is much higher still where trades associated with futures roll activity are included. We exclude these trades because they have limited economic significance but inflate turnover substantially. For more detail, see Section 3. [2]

For earlier discussions of price discovery for AGS, see Cheshire (2016) and Debelle (2016). [3]