bond yields have been driven by the global developments. they haven't declined as much as us treasuries, such that the spread between the 10 year yields is now slightly positive, having been negative over the past two years. at the time of writing, the australian government can borrow for 10 years at 75 basis points. https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 6 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 6 equity prices have fallen by as much as 20 per cent since their all - time peak of less than a month ago, although the australian market rebounded on tuesday ( graph 7 ). the falls have been particularly large for companies in the oil sector, as well as tourism. https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 7 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 7 corporate bond spreads have widened. through the first part of this move, the widening in large part reflected the rapid shift downwards in the risk free ( government bond ) curve. investment grade bond spreads widened but investment grade yields actually fell ( graph 8 ). in the last few days though, we have seen yields rise along with the spreads. the high yield sector has seen a marked rise in yields and spreads, particularly in the us reflecting the prevalence of energy companies in that market. bond issuance has been extremely low, in part because issuers do not want to appear to be in desperate need of funds in a dislocated market. it is also worth noting that just as equities prices have fallen from historic highs, so too have corporate bond prices fallen from historic highs. https : / / www. rba. gov. au / speeches / 2020 / sp - dg - 2020 - 03 - 11. html 8 / 12 11 / 03 / 2020 the virus and the australian economy | speeches | rba graph 8 liquidity in fixed income markets has been poor at times, including in us treasuries. the liquidity environment has changed considerably in the past decade in response to changed regulations. the banking sector is much less willing and able to warehouse risk and provide liquidity than in the past. the australian banking system is well capitalised and is in a strong liquid

interesting when markets are structurally imbalanced, with short - term traders, dynamically hedging, concentrated on one side. if short - term traders are structurally long, their dynamic hedging may have the effect of dampening market movements, producing zones of local stability. but where, as a group, they are structurally short, their dynamic hedging can sometimes amplify price movements, increasing volatility, if the market proves illiquid under stress. while i have set this out in a rather general way, it isn ’ t fanciful. there are examples of it going back over nearly twenty years : some involving the explicit writing of options ; some implicit writing of options ; and some arising from trading strategies that mimic optionality. for example, the 1987 equity market crash was exacerbated by the prevalence of portfolio insurance, a trading strategy akin to delta hedging an option : sell when prices are falling. a dynamic variant of a ‘ stop loss ’. similar strategies are now a key feature of some principal - protected hedge fund investments, via so - called constant proportion portfolio insurance ( cppi ). to preserve the nominal principal, the ‘ guarantor ’ will sell units in, say, a fund of funds as its value falls, and vice versa. i guess some assumptions are made about underlying liquidity, and that these are reflected in how such strategies are effected. in 1994, and again in 2003, hedging the negative convexity of us mortgage - backed securities amplified the rise in dollar bond yields, with some violence. 3 the underlying factors here, of course, are that us mortgage borrowers have an option to prepay, so they are long options on mortgage interest rates. the financial sector is, correspondingly, structurally short options, which it can – and does – slice and dice in various ways in an attempt to distribute the option exposure to those who want it. but to a greater or lesser extent, a residue is left, some of it with institutions which de facto seem to have short holding periods. they dynamically hedge, either continuously or within thresholds. a rather graphic – if, ultimately, not stability - threatening – example of what i ’ m describing occurred a few weeks ago in the structured credit markets. i ’ ll spend a few moments on this as the distribution of optionality was quite complex. for some while, a wide range of regional banks, insurers and pension funds in europe and asia