##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

down gradually over a much longer period. indeed, higher interest rates create an incentive to save more and pay down mortgage balances more quickly – this effect is known as the ‘ intertemporal ’ channel of monetary policy. at the same time, there will be some borrowers whose budgets are under substantial pressure and so they will have to run down their buffers to meet higher living and interest expenses. importantly, this additional stock of savings is not distributed evenly among borrowers. those with relatively new loans and on lower incomes are likely to have more modest buffers, if any, and they will be feeling more pressure to adjust their spending than others. the bank is very conscious of the challenges facing borrowers, particularly as interest rates have risen quickly over the past year. that said, a wide range of borrowers appear to have built up sizeable buffers, across different income groups and among both fixed - and variable - rate borrowers ( graph 6 ). for those on variable rate loans, borrowers with lower incomes added $ 17, 000 on average to buffers in offset and redraw accounts over the past three years ; this compares with the average of $ 39, 000 accumulated by the highest income borrowers. but loan balances of borrowers on lower incomes, and hence their loan payments, are also smaller on average – $ 230, 000 compared with $ 575, 000. one final caveat is that, even within the income quartiles, the average is skewed by some borrowers accumulating much larger balances than others. graph 6 average cumulative extra payments by borrower income quartile * variable - rate owner - occupier loans in securitisation system $ 4th ( lowest ) 3rd 2nd 1st ( highest ) $ 15, 000 15, 000 10, 000 10, 000 5, 000 5, 000 - 5, 000 d j fmam j j a sond d j fmam j j a sond d j fmam j j a sond d j fmam j j a sond - 5, 000 * borrowers'reported income at loan origination, grown by wpi. sources : rba ; securitisation system conclusion in summary, the lagged effect of the cash flow channel of monetary policy is likely to be somewhat elongated currently due to the high proportion of fixed - rate loans and sizeable buffers held by many borrowers. this means that it ’ s likely to