MNI 5 Things:RBA Kent: Search for Yld Cld reduce As Infl Rises

By Sophia Rodrigues

     SYDNEY (MNI) - The following are the five key observations we made from the

Reserve Bank of Australia assistant governor Christopher Kent's speech

Wednesday. Kent spoke at a debt capital markets summit in Sydney on the topic,

"Australian Fixed Income Securities in a Low Rate World."

     --Kent talked about the possibility that "search for yield" and some

increase in yields in Australia would occur as spare capacity is gradually eaten

into and inflation rises. He noted that evidence of stronger wages growth and a

prospect of rising inflation might push the U.S. economy in that direction.

Australia could be further from that point, but Kent said his expectation is

that the same forces will come into play here eventually.

     --Kent began his speech by noting interest rates on a range of fixed income

securities have risen over the course of recent month. Still, they remain at

historically low levels and spreads between non-government and government debt

have declined to their lowest levels since the global financial crisis.

     --Kent said the decline in spreads on offshore fixed income assets is

relevant for Australian markets because many of Australian corporations issue

overseas. This offshore issuance facilitates capital inflows, which are the

financial counterpart to Australia's current account deficit.

     --The decline in spreads offshore also matters because they are highly

correlated with spreads in the domestic market.

     --Kent said it is hard to say if there is excessive risk-taking in fixed

income markets. "It's not clear that the relatively low level of spreads in

fixed income markets represents irrational mispricing of risk or is, by itself,

a cause of concern," he said. Still, it is possible that we could see a

noticeable pick-up in financial market volatility, a sharp re-pricing of assets

and, as a result, a tightening in financial conditions, including higher spreads

for corporate issuers, he warned.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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