Australian Bank Bill Rates

Short end money market interest rates source from Reserve Bank of Australia Table F1. Short end rates provide an indication of market expectations of future cash rate changes, and supply and demand for short term funding instruments between banks, large investors and large corporate entities.

Selected data range from to .

Bank Bill Rates

Bank Bill Spreads

Short-Rate Models

Short end rates are an important financial instruments for determining the volatility, difusion and mean reversion of interest rates.

Vasicek

Vasicek model is defined as:

where:

• is the drift parameter which determines the speed of mean reversion;
• is the long run level of interest rates, where rates drift towards;
• is the volatility
• is a weiner process where

Using the sample period selected above the underlying long run mean and variance and mean reversion speed of interest rates can be extracted.

The least squares fitting approach is used, the following provides the estimates of the parameters fitted:

The Vasicek model does not limit interest rates to be positive, as a result forecast of negative interest rates can be generated, especially when the history has been dominated by very low interest rates near the zero lower bound or a short period of rising or falling rates is used for the analysis.

Cox Ingersoll Ross

An extension of the Vasicek model to account for a level sensitivity in the observed market volatility.

Methodology: https://www.statisticshowto.com/wp-content/uploads/2016/01/Calibrating-the-Ornstein.pdf

Bond-Bill Spread

The bond bill spread at the short end of the yield curve is used as an indicator of relative demand and supply for bank bills versus government bonds. Differences in demand arise due to:

• relative credit risk appetite (bills issued by banks are generally AA rated, Australian Government Bonds are currently AAA rated);
• transaction costs (instruments are issued on different systems which have different settlement arrangements and participant costs);
• basis and liquidity risk including coupon frequency and payment arrangments.

Supply factors include:

• new and maturing issuances of Australian Government Bonds, for example reflecting funding needs of government including budget deficits;
• issuances of bills by banks reflecting interest rate mismatch operations.