guy debelle : global and domestic influences on the australian bond market address by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, at the kanganews debt capital markets summit 2015, sydney, 16 march 2015. * * * i would like to thank emma doherty, suchita mathur and john boulter for their assistance in preparing these remarks. accompanying graphs can be found at the end of the speech. today i will talk about some of the global and domestic factors that are influencing conditions in the australian bond market. i ’ ll start with a discussion on the decline in global bond yields that we ’ ve seen over the past year or so before turning to focus on how these and other developments have played out in the australian bond market. i will finish with some recent and prospective regulatory developments affecting the local market. global influences at the beginning of 2014, the 10 - year treasury yield in the us was around 3 per cent. at that yield, investors were getting some compensation for duration risk in the form of a term premium ; that is, some compensation for uncertainty about the future path of us monetary policy. however, over the course of 2014 the yield declined steadily, reaching a low of 1. 64 per cent in early 2015, close to the historical lows reached in july 2012. with a yield of 1. 64, investors were getting little or no compensation for term risk or the risk of inflation. indeed, one could argue that the term premium was even negative. there was no meaningful compensation for uncertainty about the path of us monetary policy or inflation. this decline in us yields was also evident in nearly all advanced economies and occurred despite some notable variations across countries at the shorter end of the curve ( graph 1 ). over recent months, it has looked more like yields in germany driving those in the us and elsewhere rather than the traditional relationship of us yields driving those in other markets. in recent weeks, some of the decline in yields has been unwound in the us and a few other economies such as the uk, but 10 - year yields in the euro area have fallen further to reach new historic lows, with the 10 - year yield in germany now noticeably below that in japan. as has been remarked on frequently, the 10 - year yields in spain and ireland are currently below that in the us. at the shorter end of the yield curve, expectations for future monetary policy settings are an important driver. there has been a notable divergence in

the market, supporting investor confidence in these assets. these requirements will also provide the bank with standardised and detailed data on abs, which are a major part of the collateral eligible to be used under the clf. in preparation for the introduction of these reporting requirements and to facilitate industry readiness, the reporting system for securitisations was made available for industry testing in november 2014, with voluntary reporting accepted from 31 december 2014. the bank is currently working with a number of institutions undertaking test submissions, with some institutions expecting to commence regular reporting shortly. the industry is strongly encouraged to undertake testing early to ensure readiness for the commencement of mandatory reporting on 30 june 2015. the third development is the proposed changes to the settlement convention to t + 2 for overthe - counter ( otc ) transactions in domestic fixed income securities. the bank strongly encouraged this initiative. the current standard of t + 3 settlement in the australian market compares unfavourably with many other jurisdictions that have already progressed to shorter settlement cycles for otc transactions in their domestic fixed income markets. a shorter settlement cycle will reduce the risks associated with settlement, in particular, counterparty risk. market makers in otc fixed income securities may particularly benefit from the reduced period of counterparty exposure, as any given trade will count towards internal credit limits for a shorter period of time. this could boost market turnover and trading capacity for participants. further, moving to t + 2 is likely to encourage straight - through processing, which could reduce the risk of an operational issue affecting the settlement of otc fixed income securities. ideally, this would be implemented by the end of 2015. finally, a few words on interest rate benchmarks. the rba, together with asic, is working with the industry through afma to develop a robust risk - free interest rate benchmark in the local market, likely based on overnight indexed swap ( ois ) rates. once this is operational, this will help engender a movement of products towards referencing a risk - free benchmark rather than a credit benchmark such as bank bill swap ( bbsw ) rates. 4 we expect to see progress on this in the coming months. this is part of a global initiative that is part of the fsb work agenda. bis central bankers ’ speeches conclusion to conclude, there are a large number of moving parts in fixed income at the moment. a number of international and domestic factors are having an important influence on australian bond markets. the low levels of yields globally and domestically