6 / 7 / 2018 some features of the australian fixed income market | speeches | rba speech some features of the australian fixed income market christopher kent [ * ] assistant governor ( financial markets ) australian government fixed income forum 2018 tokyo – 6 june 2018 i'd like to thank the australian office of financial management for the opportunity to address the forum here in tokyo. today i'll discuss some of the interesting features of the australian fixed income market and how that market has evolved over the years. the australian financial market is very much part of the global capital market. indeed, the extent of that integration has increased progressively over time. over the past decade, foreign capital coming into australia from the major advanced economies has increased by more than those economies have grown ( graph 1 ). for example, as a share of japan's gdp, japanese investment in australia is now around three times the size it was 10 years ago. http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 1 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 1 this means that developments in the major financial markets around the world, including in key financial centres such as tokyo, have an influence on australian financial conditions. australia has an extensive history of making productive use of foreign capital. it has long been recognised that there are reliable opportunities for overseas investors to profit from investment in australian assets, whether they be physical or financial assets. this has enabled australia to have sustained sizeable current account deficits over the course of the past 150 years or more ( graph 2 ). http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 2 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 2 after australia opened up its capital account in the early 1980s, the current account deficit became a bit larger on average than it had been for some time. that led to a steady build - up in the ratio of net foreign liabilities to gdp ( graph 3 ). over the past decade, net liabilities have continued to increase, but by no more than the rise in nominal gdp, so that ratio has been little changed at around 55 per cent. underneath that overall stability, there have been important changes in the make - up of the different types of liabilities, and the

##modative monetary policy and the low rate of inflation have contributed to easy financial conditions for issuers. also, there has been a noticeable improvement in measures of business conditions to well above average levels ( graph 10 ). the resulting improvement in, and outlook for, business profits has helped reduce actual and prospective defaults. in turn, this has underpinned a narrowing of credit premia. http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 9 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 9 http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 10 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 10 these low spreads are mirroring developments overseas ( graph 11 ). again, this is consistent with australia's open capital markets. spreads reflect an assessment of risk, and if the price of risk in australia were to deviate too far from the global price – beyond that suggested by any differences in fundamental credit quality – there would be opportunities for profitable arbitrage. one way or another, the process of arbitrage would lead to a degree of convergence between spreads. http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 11 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 11 australian issuers have responded to the low yields and low spreads over the past couple of years. issuance in many markets is up. banks have taken advantage of favourable funding conditions to tap the bond market. in 2017, their gross issuance of bonds was the second highest since the global financial crisis ( graph 12 ). and net issuance this year is currently running well ahead of issuance at the equivalent time last year. http : / / www. rba. gov. au / speeches / 2018 / sp - ag - 2018 - 06 - 06. html 12 / 19 6 / 7 / 2018 some features of the australian fixed income market | speeches | rba graph 12 corporate bond and kangaroo issuance rebounded from their 2016 levels in 2017, although there have been recent years where issuance was higher. in early 2018, spreads in the kangaroo market narrowed to