Transcript of Question & Answer Session The Stance of Monetary Policy in a World of Numerous Tools

Thank you, Chris. That was very enlightening. I'll just introduce the panel, first of all, before we go to questions relating to your speech. We've got Chris Dickman, the Senior Portfolio Manager at Altius Asset Management. Andrew Kennedy, Director, Treasury Services at South Australian Government Financing Authority. Anthony Robson, CEO and Managing Director of Yieldbroker. Darren Sloane, Director of Debt Syndicate at ANZ. Andrew Walsh, Managing Director and head of Australia and New Zealand G10 rates trading at Citi. Jeremy Zook, Director of Sovereign Ratings for Fitch. Unfortunately, Andrew Walsh and Darren Sloane are only available on dial in at the moment, so that's why you can't see their faces. But the first question I'd like to ask comes from Belinda Cheung at CBA. A question for you, Chris: Has the RBA conducted the monetary policy framework review in the same way as the Fed, Bank of England and the ECB is doing or have done?

Thanks for that question, Belinda. The answer is not a formal one. We did have, though, a thorough discussion of the inflation targeting framework that's being used by the bank a couple of years ago, by way of a conference where we invited a series of well-known academics and other central bankers to come and present at our conference here in Sydney. But no, we haven't had a formal review of the framework in the way that the Fed has. It doesn't mean we're not always thinking about at least that, particularly with regards to our policies, how they're working, how effective they are. Thanks.

Okay. Thank you, Chris. I've got a question from Swati Pandey, at Thomson Reuters and her question is about expanding the balance sheet. She said: Markets are predicting the RBA would soon start buying five to 10-year Australian government bonds and semis. Could you provide some insight on the Board's thinking there? And secondly, if the RBA were to start buying longer-dated debt, what form would it take?

I think we've made it clear, including recently in both a speech by the Deputy Governor and the Governor about the fact that the Board is continuing to consider the case for additional monetary policy easing. That's intended to provide further support to jobs and the overall economy. And as the Governor noted recently, it's worth thinking about that, of course, now that those policies, any such further policies might gain a bit more traction now the economies are opening up further, including in Victoria.

I can't really speculate on a lot of details about exactly what they're considering other than just to echo what the Deputy Governor has already said. So he noted quite clearly that one option was, in fact, to buy bonds further out the curve to supplement the three year yield target and that those purchases further out could occur on a regular basis. So I think most people would think of that as QE. And the intention there is to bring down the longer end of the yield curve. That would reduce funding costs, most obviously for governments, but also the private sector since risk-free yield curve is a key benchmark. It probably also has some additional portfolio balancing effects, including on the exchange rate and one effect, one imagines, a lower exchange rate than otherwise. But more than that, I can't really speculate. Thanks John.

Thanks, Chris. And a question here from Matthew Squires at Bank of America: Has the Board given any thought to where the surplus ESA rate, the corridor floor, might move to if or when the cash rate is reduced further, which the market is pricing in for the November meeting?

Yes. So going back to what the Deputy Governor has already mentioned, another option is, of course, to lower the current structure of short-end rates that we have in place through our various tools. And he noted, of course, not into negative territory, but there's still a little room to compress those further. So that would be the cash rate target, the yield target, but also the remuneration on ES balances, which is currently at 10 basis points. So those all could go a little lower than they currently are.

Okay, and Matthew's asked a second question. He says: The TFF has been untapped the last two weeks. Are you concerned banks will delay tapping additional TFF until nearer to the June 30th deadline in order to either term out their funding and/or benefit from further reductions in TFF rates before then?

No, I'm not concerned. These sort of questions were being asked around the early months of the TFF when we had the initial allowance that was open until the 30th of September. I've given fairly detailed comments on that in a speech fairly recently about the mechanics of the decisions that are facing the banks. At the moment, because short-term funding rates are very low and even lower than the TFF rate, it makes sense if the banks don't need those longer term three year funds available through the TFF right now … it makes sense for them to hold off for time and take it up closer to the deadline that applies to that part of the TFF.

So that sort of makes sense. And then on the other hand, they have to balance the fact that maybe they don't want to take it all out, right at the last minute, because that imposes a larger funding burden at the other end of things. And I think banks have shown with the initial allowance that they've come in kind of late, that made economic sense, but they've spread those to a degree and they're going to manage the liquidity at the other end of things, very carefully and quite well, I'm sure.

Matthew's coming with another question. Matthew, could you repeat the question, because I'm not sure what you said. I'll come back to that one, Matthew, because it's not come out clearly what you mean there. There's a question now from Dick Rickard at Refinitiv and this is for the whole panel. Has there been a notable impact on trade volumes in Australian government bonds and semi-government instruments compared to prior to the TFF being put in place? And if so, has this been domestically driven or is it from offshore investors? Does anyone from the panel want to have a crack at that?

It's Darren from ANZ. I could touch on that briefly. Certainly, since the introduction of the TFF, we have seen an increased level of demand generally from both the domestic and offshore investors. There's a number of factors, not just driven by the TFF that is adding to that. Looking from a domestic point of view, obviously, with the impact of the TFF and also recent moves or announcements in regards to the CLF, that's only heightened domestic demand for Australian Commonwealth government bonds and semi-government bonds from balance sheets.

But also, looking at offshore, we've seen a number of factors such as the move where the Aussie/US spread has moved into positive territory, which is the first time since early 2018 and that certainly has driven a large increase in offshore demand. Adding to that, an attractiveness on a hedge basis from other offshore centres, such as Japan and Korea. So there's certainly been an uptick, generally, in demand, certainly offsetting the large increases in supply that we have seen from both the Commonwealth and the state. So we've seen a very constructive investor backdrop.

Okay, thanks Darren. This is Matthew's question: If BBSW was to set below 0%, so if, for example if the RBA cut rates again further, would this concern the RBA given the Board's previous opposition to negative interest rates in Australia?

No. I think the Board's focused very much on the policy tools and the interest rates that we have direct control over. It would not be unexpected for BBSW to potentially pop below zero. It's spent a bit of time as I showed it my chart a bit below OIS. But it wouldn't be far below zero and it's a wholesale rate. It doesn't necessarily imply anything about let's say the interest rates banks charge to their retail depositors.

Okay. This is a question from Sophia Rodrigues from CentralBankIntel. And this is a question for Andrew Kennedy: Dr Kent just said one of the aims of any bond buying at the longer end of the curve would be to reduce government borrowing costs. How do you think it will impact a newer borrowing plan?

Thanks, John. Thanks Sophia, for the question. We don't necessarily target rates when we come to borrow. What we're looking to do is to match fund our balance sheet to our client's borrowing activities. So I think there'd be a number of different considerations that we would have to weigh up, but they wouldn't necessarily affect how we went about borrowing funds against our program.

They'd be more concerned around what the appetite was from the state's clients in regards to their borrowing opportunities. I think it's probably worth noting as Darren alluded to before that we've seen a positive Aussie/US curve, which has helped some of the supply demand dynamics. Obviously, if we saw negative rates at the front of the curve or lower borrowing costs at the back end of the curve that did affect some of that demand dynamic from offshore investors for Australian product, that might have implications as to appetite for state and government bonds. So it's not necessarily as much as saying this is a fantastic outcome. It's more about, are we going to be able to have access to markets, to raise funds at the time and for the term that's required to meet our client's borrowings.

Okay. Thank you, Andrew. Now a question for the panel. First of all I'm going to ask it to Chris Dickman, portfolio manager at Altius Asset Management. And the question is, which policies do you believe the RBA and other Australian authorities have adopted since the coronavirus outbreak have been the most important or worked the best and is there anything that they could have done better or earlier?

Thanks for the question, John. There's two parts to that. The most challenging part, from a market's perspective is when the global lockdown first came into being and the Saudi Russian oil fracker escalated, pushing oil prices precipitously lower. So with that, the liquidation of assets was quite furious. So that included, obviously, treasuries and Aussie sovereign bonds. So I'm touching on, rather than rallying that the acute dislocation meant that, over a 10 day period, the 10 year bonds sold off about 2%. So the Reserve Bank buying intervention longer bond curve was actually critical policy.

It restored liquidity and the defensive elements of sovereign bonds. One could argue that the buying action itself was more meaningful for the bid offer spreads and market functionality than the earlier liquidity provisioning. That was certainly a very profound policy introduced and then once normality resumed, the RBA stepped out other central banks that tend to linger longer and acted the distortions.

So that's the first part of that question. The second is just to do with the yield curve control point plus the RBA backing term funding facilities. I think they're wise policies, they recognise Australia is a bit different perhaps than other markets insofar as we're much more of a banked market. The banks play a more pivotal role compared to say the US where you've got corporate bond access is far more important there.

So early in the crisis, the TFF stabilised the banks, stabilised their bond funding programs and financing rates. And subsequently it's a key monetary policy, they should provide greater efficacy as, can I just describe their role with respect to fiscal policy, infrastructure spending, et cetera, and then hopefully transmits to the small to medium size enterprise sector as well, given that most SMEs, their finance comes through mortgages and many of the smaller banks are mortgage lenders rather than commercial lenders. So that's an important point to pick up on there.

Thanks, Chris. Can I ask the same question to Andrew Walsh, who's Head of Australian New Zealand G10 rates trading at Citi? Andrew?

Yeah, thanks John. I think that the bank was very transparent and open about their policies and the way they use the TFF to use banks to transmit funding and lower rates through the economy. So that was very effective. I'll move on to what the markets are looking at now and the focus since Dr Lowe's speech last week, which was as, as Chris alluded to in his questions already, the potential for further QE. Commentators have jumped on this as a reason within the world of relativities for the RBA looking to get the exchange rate lower. We're not totally convinced by that. The RBA owns about 8% of the float of government bonds outstanding, whereas the RBNZ is another example, owns about 25% of the bonds outstanding, and they've been very aggressive in their buyback programs. Over that period, the New Zealand TWI has still increased.

Now, admittedly that spanned over a period of a weak US dollar where the New Zealand dollar generally outperforms, but it's not a direct pass through link. Even saying that, we still think it's an effective measure. It's like part of the team Australia game and, as Chris said, as the economy moves into upswing to provide further support to SMEs and small businesses, is hopefully a policy that will gain traction and help the economy through and help jobs as their objective states. The interesting thing out of this is, for investors, as we've heard from Darren, offshore portfolio investors if they probably moved overweight, Aussie fixed income this year from an underweight position over the last couple of years in government bonds, simply because of the differential to US rates. Since the crisis, we've probably averaged around 20 to 25 over when we now sit at flat with the expectation of further QE from the Bank at the November meeting. So that may say, have some impact on investor demand at the margin, however, further out the curve in the ultras. That's a part of the curve that, from our offshore client base is very highly sought after. The steepness of our curve there is the widest in the world. On an outright yield basis, there's great demand out of Asia and Japan for our product there and in both government and semi-government paper.

And then also just on an asset swap basis for investors in say, Europe, they can swap an Aussie bond back to their own currency and still pick up 30 basis points in government space and then an extra 50 or so in semi space, if they're looking at it that way and the returns are even higher for Canadian investors. So those parts of the curve for investors will remain appealing. And the feedback from our offshore investor base is the ultra-part of the curve will remain very much in vogue for them on, on the Aussie curve. However, with the differential back to zero against the US we're probably going to see a little bit reduced demand in the shorter end of the bond sector curve now.

Thank you, Andrew. And the same question to Jeremy Zook, Fitch Ratings and the question is about which policies were best introduced by the RBA and the other Australian authorities? And is there anything that they could have done better or quicker?

Yeah, I think from our view, comparing it more globally, the RBA and the Australian fiscal authorities have been quite responsive and effective in their response to the coronavirus shock. I think from our view yield curve control has certainly been a key factor and our house view is that the RBA will extend targeting further down the curve. Here I want to touch on the other panellists have gone into great detail on the monetary response, just briefly on the fiscal response as well. Looking at the other Australian authorities, we've seen quite a strong fiscal response in Australia that's played a good complement to what the RBA has done. Australia's fiscal response compared to others globally has been quite an active use of fiscal policy and certainly, the amount of fiscal stimulus provided by the Australian authorities has been relatively high compared to others. So I think there's been some good complementary actions as well between what the RBA has done and what other authorities in Australia have done as well.

Thank you very much, Jeremy. The next question is about the impact of the huge amount of increase in government issuance from the Commonwealth and the states are Australian economics from the 1980s and the argument then was if you increased supply you would cause a lot of inflation and crowding out. Now this hasn't happened and what happened to that disaster talk. As far as I can see the extra liquidity you have in the Australian market, appears to have outweighed excess supply as far as international investors are concerned. So, Andrew, what do you think about that? Why hasn't huge increase in supply from the states, from the federal government caused problems?

Yeah. Thanks, John. I think it's worth just having a look at what that increased supply has looked like. So over the last 12 months, we've seen total supply of government and semi-government debt up by roughly about 25% from circa $800 billion of term debt to now just over a trillion dollars. And I think it's worth identifying that there has been a lot of talk about the fact that we've seen a massive increase in debt. And certainly, when you look over the forward estimates for government and state government budgets, and obviously there's a lot of state governments still to report including South Australia over the next month or so that you'd expect those forward projections for debt to continue to increase. And we did certainly see in March when markets were dislocating and liquidity was at a premium that we did see some concerns about that increased supply of debt.

And we did see some blow outs in spreads. We saw or heard anecdotal evidence of offshore divesting. And we did obviously with the change to the withdrawals from superannuation, we saw domestic funds also liquidating, which caused some supply digestion in the local market. However, markets repriced very-very quickly. And, primarily due to the fact that we have a strong central bank support in terms of their bond buying, targeting a three-year bond yield at 25 basis points. Notably, since they've come into the market and whilst they haven't been active lately, they've bought $78 billion of government and semi-government securities since they first started their program. And they've also obviously added liquidity through both their open market operations and the term funding facility. So we've had central bank support, that's helped balance some of the supply in initial instance and then we've seen strong demand from investors and Darren will be able to talk to this better than I can around what some of those demand from both domestic and offshore investor says look like, but certainly when we've gone to issue in markets, as I think our peers would also attest to that there has been widespread distribution of our bonds, both domestically and offshore. And some of the reasons for these are basically the Australia is still seen as a safe haven investment. It has relatively high rates amongst the AAA block. And there's also a very stable political environment, unlike some of the other geopolitical risks that we're seeing globally at this point in time.

So as far as we're concerned, does this deficit and debt problem continue to be there? Yeah, I think there's still some noise in the background and there still is some work to be done in terms of the fact that there's a lot of heavy lifting to be done by government borrowing agencies, not just in Australia, but globally, but there is also that offsetting factor at this point in time in terms of increased investor demand and central bank support for markets.

Thank you, Andrew. And so, Darren, what have you seen as far as the investor side is concerned about how they're reacting to all the extra supply from Canberra and the stakes?

Yeah, I would think so. In terms of the demand side of things, very much touched on that last question, but it is very … it's driven by the introduction of the TFF and change the CLF, the Aussie/US moving into positive territory curve shape, as mentioned by Andrew earlier, attractive hedge costs, attractive carry. So there's a number of aspects in a number of things that are pointing to pointing investors to the Aussie dollar market, to Australian Commonwealth government bonds, to semi government bonds.

So I think from a demand perspective, we had been in a good space. We continue to be in a good space, and there's obviously, a number of moving parts to this going forward. And, and there's obviously potential for further action by the RBA in the form of QE. But we'll have to see how that transpires. In terms of say, you mentioned the question of a crowding out effect. There's very little evidence of that. In fact, I think what we've seen with the economic outlook is a drop in private sector investment and intention. So, the business credit growth has been weak and will remain weak for some time, I would think. So there is little risk of crowding out. I assume that to be the case for at least the medium term, anyway.

Thanks, Darren. The next question is about Australia's rating is one of 10 countries to have AAA ratings from all three main agencies, a question first of all to Jeremy at Fitch Ratings is could Australia lose its AAA rating status? And if so, so what?

Yeah. Thanks John. Well we put Australia's AAA rating on negative outlook back in May. And that was really just a reflection of the significant deterioration that we were expecting in public finances as a result of the pandemic. And, so while we do think that Australia has fiscal space to respond to the coronavirus shock, certainly from here on out that fiscal space becomes much more limited. And so from our view, it really becomes important about what we see as the government's plans over the medium term, and whether the gross debt to GDP level stabilises, or it goes on a downward trajectory over that medium term horizon. So, that's really what we'll be looking for in terms of where the rating goes. The government, the federal government in its recent budget does put forward a plan to stabilise debt over the medium term. We do still see a lot of risks around that outlook.

If we see more substantial scarring in the Australian economy, as a result of the coronavirus shock that could weigh further on growth, require a longer period for unemployment to drop below the government's sort of 6% unemployment rate threshold that they've set. So there are still a lot of risks to this and so we'll be paying close attention to the medium term fiscal outlook for the government.

One thing to note is that we do have sort of a record number of sovereigns on negative outlook at the moment, including Australia, and then also in the AAA category the United States, and we do expect the conversion rate of the negative outlooks to be probably a little lower than what we typically have, but still there is a risk. And, and so certainly for the question on so what?

I suppose I'll leave it to the market participants on the panel, to discuss the implications for borrowing costs as there are certainly a lot of factors that contribute to borrowing costs beyond the rating itself, but from our view AAA is a very, a rather exclusive and stable set of sovereigns. And we have 10 sovereigns at the moment that are at a AAA rating after we downgraded Canada this past June, this is the lowest number of sovereigns that we've had at AAA. And of course, once a sovereign does lose its AAA status, it can be quite difficult to regain that we have not had so far a case where a sovereign has regained AAA since losing it.

So, from our view, we do view AAA as sort of quite an elite group of sovereigns and so once that is lost, it is quite difficult to regain. One other final point is that if, in the event that we were to downgrade Australia, I think it would also depend on whether markets view this as a one-off downgrade or the beginning of a trend in downgrades and from my view, the latter wouldn't really be the case for Australia at the moment.

Okay. Thank you and same question to Anthony Robson at Yieldbroker, particularly would it matter if Australia lose its AAA status? Anthony, can you hear? Okay …

John, can I offer a comment while we're waiting for Anthony to possibly come back in?

Go ahead, Chris.

Yeah, I think maybe I'm just echoing some of what's already been said, but the starting point is to reflect … that the high current rating reflects a long history of very sound management of public finances in this country, both at state and federal levels. It's true debt, of course, will rise with deficits. The two go hand in hand, but that's part of the very crucial fiscal support that we're seeing. Debt is still low, both at state and federal levels.

I think the key issue is – while I'm not disputing that the ratings may change –I think the key is not to focus on any potential change in the ratings that come from that rising debt. Instead, I just focus on the fact that I think the rising debt is very manageable. It's certainly affordable, given interest rates are as low as they've ever been and it's, and it's the right thing to do for the economy. I think the other question is the effect, if any, … if there was to be a ratings change, what effect, if any, would that have on the price … on the cost of debt? And the experience of other advanced economies is not very much. Because the main feature of the global economy at the moment is interest rates are as low as they've ever been. Thanks.

Okay. Thank you. Okay is Anthony Robson … Go ahead Chris Dickman.

Oh, I was just going to make the point pick up on what Chris just said there. If you look at the UK, they were just downgraded and their 10 year bond yields actually rallied to 16 basis points. So it kind of answered the point that the critical role of central banks are playing in dominating bond markets because of a monetary policy tool rather than an investment per se?

And also, John, I'll just make the point in the semi-government space already have TCOR and TCV are AAA but QTC are AA+. So you already have that sort of delineation there and despite the other two, potentially being downgraded soon, the impact on their spreads is not market.

Can you hear me now, John?

Who's that, is that Anthony?

It's Anthony.

Anthony, yeah. I just wanted your views on what will be the impact if Australia did lose its AAA status?

All right, I just heard the end of what Andrew was saying and I think there's a couple of pertinent points. First and foremost, there are only 10 AAA rated countries. I think there's only four AA+ rated countries globally. We represent a relatively small percentage of total investment on a global basis. I think it's about 4% on the index and the relative benefit that investors have received over a very long period in investing in Australia has been quite significant. So I think the memories of … that corporate memory from investors globally is still very strong. Australia would still be a very high rated currency. I think the bigger issue is actually where we would sit as a relative return to some of the bigger economies like the US, I think that was touched on earlier, flat to the US it's a different relative value than at 20 over or 40 over, which is where we were a few months ago. The impact at the end of the day is a demand supply impact. We know that there's going to be supply. It's a question of whether the demand comes and there aren't that many choices for high rated debt across the world, as far as AAA and AA+ are concerned. Personally, I don't think the impact is going to be huge.

Yeah, I think that's the general consensus. Seems what happened with treasuries and the gilts, as Chris said. My next question is about the possibility of negative interest rates in Australia, whether they would be welcomed or a sign of desperation or just more harm than good. I've got you there Anthony, would you like to answer your thoughts on the potential for negative rates in Australia and what it would mean?

Sure. Look, I think anything's possible, but again, personal perspective, I don't think it's necessarily desirable. One of the things we're hearing about in the press is the lack of availability of a return for our retirees. It's certainly a growing investor class within this country. I think we've seen in the RBA is at pains to explain this over the last few months that while it may cause a bit of a sugar hit in the initial stages, the longer term impacts are quite questionable at best. And if you looked at, say the European, I think you've got four sovereign bonds in Europe at the moment in 10 years that are trading under zero.

I think you've got Germany, Switzerland, two others, France … The impact on those markets in particular with a rapidly growing ageing population. And in fact, that average working age increasing very quickly, the impact on social welfare is enormous. Now we don't have quite that problem in Australia. We do actually have a positive population growth, which is good and particularly in that tax-paying bracket, that 30 to 50 year old bracket. So we don't have those problems. The benefit we do have right now too, is that we do get a pickup as far as yield is concerned. I think it's quite dangerous going down a negative interest rate path though, with a growing retiree population. It forces them to take a lot more risk to generate the sort of returns that they expect to get with the nest eggs that they had.

Okay. Thanks, Anthony. Can I ask the same question to Andrew Walsh at Citi?

Yeah, sure John. Effectively, the RBA has been very transparent like I said about using banks as their transmission mechanism through this whole crisis. And if we look at the offshore experiences in Europe and Japan where negative rates have been adopted, the equity prices of those bank stocks has been a significant laggard and I think that just shows that the main the institutions have suffered the most out of this is, the hand that feeds the economy in this environment, and that's the banks.

So I think that the RBA are very reluctant, they are being very public and vocal about this, all the members of the committee. I think that their approach is as we discussed earlier on the call, will be a lot more to do with the QE and flattening term premia and term structures on the curve before they go down the path of negative rates. And negative rates may only come back into the equation when we're talking about relativities again, and hopefully that's not the case and that the economic upswing can take place.

Okay. Thank you, Andrew. Now, the next question is for Andrew Kennedy and it's about the AONIA linked markets, because SAFA is the only issuer besides CBA RMBS to issue AONIA linked notes. And I wondered, is the progress in this market stalled because of TFF and the current monetary policy and also, what does the future hold for an Australian risk-free reference rate?

Thanks, John, I think there's a number of things to consider here and the first part of it is that the end of IBORs haven't changed and going forward the IBOR suites will be phased out and that's well-known. In Australia, obviously the reserve bank is supportive of a multi approach to short-term interest rate benchmarks. And one of those that obviously we're very supportive of, and we've seen other support for, has been AONIA. This has obviously been a way that we've wanted to scope our short-term borrowing program. Yes, there's been some changes to the dynamics at the front end of the market, especially with the results of the extra liquidity, the TFF and that has seen the RBA cash rate trade below the target cash rate and large amounts being left in the ES accounts, and that has affected some of that supply dynamics for short term issuance.

But it doesn't change the fact that the IBOR suites will be phased out by the time. There's been no change when they're going to be removed in offshore markets. So the need for a risk-free rate benchmark in Australia still remains very, very strong. And certainly, there's a number of considerations for both borrowers and issuers in the space around how they're looking to manage their short term interest rate risk, because whilst we do have this liquidity being supplied to markets at the moment through central bank activity, it's not going to be there for forever, nor is it going to be infinite and so when markets do return to some sort of a pre-COVID dynamic, then you will have a change in what some of these short-term funding instruments and dynamics look like.

And being able to have a choice for issuers and investors regarding how they want to manage their short-term funding risks or their short-term investment risk is going to be an important consideration going forward. So whilst there might've been some … I'm not sure whether intended or unintended consequences from what we've seen from the central bank actions, it doesn't take away from the fact that as an issuer, I still believe it's an appropriate benchmark for us to be building into our investment products. And where can it be continuing to use it because we're a government organisation using a risk-free rate is the risk that reflects what our borrowers want to see within the products that they're using to manage their risk.

So it still remains very relevant as far as I can see. Whilst we haven't seen other issuers racing to the table to come and use this as a format it doesn't mean that it's still not relevant or there's still of work being done. We've just seen some changes in market dynamics where people had to focus, on other parts of their businesses just due to what we've seen in the changing conditions, across global markets, not just Australia. I think it would probably worth tapping into Darren here to see what his thoughts are around the investor piece regarding different benchmarks.

Yeah, definitely. I think in terms of the investor base for the AONIA product, we've certainly seen it develop over time with moving from the inaugural transaction out to more recently this year, where you've done a number of issues. Certainly, we've seen the interest in demand across the number of investors grow certainly dramatically. Even when we look out to the longer tenor issue that was done, that's probably the best example of where we've seen a really strong growth in investor demand. And the granularity of the book there, was a real testament to this product and how well it's been taken up by investors in this market and I expect that to continue on as well.

John, it's Chris Kent, can I just say one thing? I was just going to say that as the RBA is the administrator of AONIA … that's the cash rate benchmark which I'm talking about here … we've made sure that we have robust fallbacks built into the cash rate procedures. So for those times –and there have been more of them of late given the high level of liquidity in the system – for those times when volumes traded in the cash market are insufficient to calculate a transaction based rate, we've still been able to publish the cash rate. And I think people should rest assured it's a robust benchmark in that regard and it continues to reflect interest rates that are relevant in the unsecured overnight funding market.

Okay. Thanks, Chris. Next question is about green bonds from Rob Fowler at Essential Change. Obviously, three of the states have issued green bonds, I think New South Wales has just issued one new 10 year green bond today. Over six sovereigns have issued green bonds, Germany had a massive order book for one earlier in the year, and I just wondered, I don't think we can ask what the prospects are for the Commonwealth government green bond, but if it did do one, what would it be? I'm now going to Chris to come in and Darren, what would be the demand do you think for a sovereign green bond and could it potentially price inside the standard sovereign curve? I've asked that to Chris, what do you think the reception would be for a sovereign green bond from Australia?

Well, I guess we started an ESG fund seven or eight years ago, and then we've recently launched a green bond fund. So we're very, very keen to invest in more high quality assets and clearly we're not on our own. So I think that the appetite would be quite significant just from what I've seen this morning, the [TCOR 30] issued today had about $4 billion of bids, size looks like about 1.3 billion, which came with a yield pretty flat to the non-green for lack of a better word, TCOR curve.

So that probably gives you a bit of an insight in terms of the demand and the pricing dynamics that are at play. And from the government's perspective, I would've thought it's a pretty attractive thing to do. And as far as … There's a Canadian study on it, I'm not sure if everyone's seen it, but it suggests about five times as many jobs associated with green energy projects compared to conventional. So in the environment where the government's all about jobs, green infrastructure projects, will have particular attraction in that environment anyway.

Thanks, Chris. Darren, what do you see about demand for green bonds in relation to standard bonds from the states and the Commonwealth?

Yeah. In terms of demand side, they're very much both domestically and offshore, the demand for ESG issuance, including green bonds is only growing. It has been over recent years and continues to grow. That's obviously been evidenced by the increased issuance, as you mentioned, from the states, New South Wales, Victoria and Queensland have all been active in that regard. So too other sovereign issuers. And look, I would suggest that the AOFM has been very closely monitoring these things. But it's an attractive pocket of demand, or I'd say it's greater than a pocket of demand currently that the issuers are certainly taking note of. What we have found domestically is that investors prefer to really be, especially in the semi-government and I would suggest, the Commonwealth would be similar, but they really would prefer to see green issuance, let's call it, in line with benchmark terms.

There is some weighting which is now starting to potentially drive that green issuance or ESG issuance inside of benchmark curves and we have seen that evidence offshore more so in Europe than the US but certainly we are seeing that as a trend. So I think, it is obviously of great interest to all issuers. And I think what we've seen over … Especially even the states is that, the government was in each of those cases, probably the initial driver in terms of having that inaugural issue. And ideally, we'd see the federal government move in that regard and ideally leads the Commonwealth to issue something along those lines, but it's very much for them to comment on, I would suggest rather than us making assumptions. But another aspect which maybe Andrew Kennedy might like to touch on in terms of, rather than say an issue, which is more bespoke in terms of green bonds, looking at somewhat of a programmatic issue, having a program classified as either under an ESG type scenario.

Yeah. Thanks. I am happy to talk to that. It's been a landscape that's developed significantly, especially over the last five or six years, to where it's now commonplace for issuers to want to tag their investments as green or sustainable and investors to want to have portfolios that are certainly tailored towards those style investments. But I would make one point here in the way that we've gone about considering this and that is when you look across what governments do, whether they're commonwealth governments or state governments, they're basically meeting the criteria of the UN sustainable development goals in everything they do. Whether it's environment, whether it's social, whether it's governance, they're ticking off … Ticking off is not the right word, but they're achieving ESG objectives in everything that they do. Social housing, providing support for hospitals, for your education, for your underprivileged, it's part of what the governments do as their mandate.

So trying to say that you want to isolate a certain number of these assets to secure a small amount of your portfolio, I'm not necessarily sure that's the right way to go. And when I look at SAFA, say as a smaller issuer, there has to be a better way of not risking the liquidity you have in your curve by isolating a small amount of debt within your portfolio. So what we're trying to do here across South Australia, which SAFA has taken the lead on is to develop an across government framework to ensure that everything that the government is involved in, and that SAFA is involved in financing, does meet the UN sustainability goals in terms of how projects are known and appreciated to be funded.

So we're not wanting to go out there and say, hey, let's just do a green bond issue for the sake of doing a green bond issue for labelling purposes. I want to make sure that we're doing things with the right approach, with the right long-term strategic objectives, that we'll be able to provide confidence to investors that if no matter which piece of SAFA debt they're investing in, that the general use of proceeds will meet the criteria of the UN sustainable development goals, because I think that's more important.

Thank you, Andrew. This is a question for Chris from Michael Heath at Bloomberg News. And Michael says: Your speech seems to be a rebuttal of some of the criticism of the RBA that it hasn't done enough to respond to the crisis. Do you acknowledge that the RBA is doing less than most of its counterparts? And if so, what makes Australia different?

Well, I think my response would just say I think we have provided significant support to the economy in the right ways, especially as it was noted earlier in the panel discussion. Early on with addressing the most critical problems, particularly bond market dysfunction. I think the other thing that we've said of late is that the Board in considering what further measures it might undertake to provide further support for jobs and the economy more broadly. We are focused on the issue of the traction such policies would gain and the Governor has said, "Well look, now that the economy is opening up, any further support would gain a little bit more traction."

I think the other really important thing to focus on, and I think we've touched on that already in the panel discussion earlier today, is just that fiscal policy is really playing a very crucial role and the fiscal policy support has been very substantial and important in supporting people's incomes and supporting jobs. And monetary policy is helping to support that. I think those are the really critical things to focus on.

Okay. Thanks Chris. This is a question from Kit Lowe at Lowe Capital Management and it's for Jeremy. Jeremy, do Fitch take into account the amount of central bank buying as a percentage of outstanding issuance when assigning ratings?

Yeah. So, on that we don't take the percentage as the total of the outstanding debt directly into our ratings. Certainly, the impact that it has on government borrowing costs, in that it generally lowers those government borrowing costs does have a positive impact on the rating. Just in terms of lowering government debt service, allowing governments to carry a larger debt burden more sustainably. So, that does factor into our rating assessments, certainly in a positive way, at least in the near term. So, that's really how we look at QE. I guess more broadly, we do have a discussion as to the impacts on perhaps Central Bank independence. But that's not the discussion really in the case of Australia, just a broader view on our approach in some emerging markets in particular. But yeah, generally a positive effect just in terms of the impact on borrowing costs.

Thanks Jeremy. Let's see what other questions we've got here, from David Rickard at Refinitiv: Has the organisation structure in the Australian market impacted the success response to the use of TFF or have there been other factors such as our ratings or something else? Yeah, sorry so I'll repeat it. Has the organisation structure of the Australian market impacted the successful response to the use of TFF or have there been other factors such as our ratings or something else? So has TFF been so successful? I'm not sure how to answer that. I think …

I'm not quite sure where he's going with that one. Maybe he can resend that one to you?

Okay. Yeah. We can have a look at that individually. I think he means why has TFF been so successful. I guess, is the reasons he said, the structure of the market, the strong ratings, and other … Okay. Let's move on. This is from Adrian [Jenchek]. What does inflation sustainably in the range mean in practise?

I think that's one thing the Governor tried to clarify in his most recent speech. The first thing is that, first, we actually have to see a measure of inflation in that 2-3% range. Second, inflation particularly in underlying terms tends to be a fairly slow-moving measure. So once it's in the 2-3% range, particularly if it's been on an upward trajectory, one imagines, it will stay there for a time. And that it's something that is subject to some degree of judgement and will be explicit in our forecasts. So first and foremost, actual inflation has be in that 2-3% range before the Board would consider tightening monetary policy, raising the cash rate. And secondly, for it to be sustained, one imagines you've got to have forecasts having it stay in that range for a good time.

Thank you, Chris. This is from [Wotan Lorinda] with CCB: Would the RBA consider buying 10, 15, 20 year Australian Commercial Bank bonds with the core covenant being that they'd be used for owner occupied mortgages? This would enable the banks to provide 10, 15, 20 year fixed loans at very low rates, thus giving households confidence to increase spending, importantly could such a program be extended to second tier banks?

Well, I mean the demand for various reasons for fixed rate loans out that length, just have never really been there in Australia and I think it's from lack of demand rather than the banks not wanting to do the financial engineering to make them a viable product. Fixed rate loans make up a fairly modest share of total lending for mortgages. And even those are fixed for one, two or at most three years typically. So it's not clear to me that the supply is constrained rather than the demand and that's for all sorts of reasons, including the treatment of mortgages for tax purposes. So Australian households like paying their mortgages down quickly. That's not a bad thing. That's a good thing for financial stability. That's been the norm for many a year in Australia and I suspect it will be continuing.

Okay, Chris. Are there any other questions from the panel for Chris? Has he answered everything to everyone's satisfaction then?

Okay. I've got one, one more for Chris and that's all right. So Chris with the amount on the ES balances at the moment, a lot of the TFF money is sort of going back into that along with the bond buying that you mentioned earlier. Now, the credit growth scenario doesn't look that rosy in the short to near term. So potentially TFF money is, negative carry for banks who are borrowing at 25 cents and lending it back on the overnight rate at 10 cents. How does the RBA look at that? Do those sort of negative carry implications factor into your policy decisions and into your discussions?

I think it's more question that … It's a good issue you've raised. I think it's more a question for the banks as to whether or not they want to take up the option of TFF. And I think they've shown when we approached that deadline for the initial allowance, which was almost all of it was taken up that if you're doing a calculation before that deadline, that says: "What can I use these funds for?" And if you're just going to park them in your ES balances and not lend them out or find some other use for them, then that is a negative carry because at the moment you pay 25 basis points for the funds and you receive 10. But if you do have a borrower that you want to lend out to, well, then you'll get a pick up there and it'll be profitable for a bank to lend that money out, particularly for a business and most particularly for small and medium sized enterprises, because we give the bank that does expand their lending to business, extra TFF allocations, extra access to cheap TFF funds.

And I think the other thing they can think about, and this is what I went through in the speech … they could think about the time that their bond is rolling off of their own and those are rolling off at … If they were to replace them, we'd have to issue a bond at much more than 25 basis points at the moment. So it would make sense for them to use TFF funds to replace those funding sources. And then as I suggested, they could use the funds to invest in bonds, government, and corporate, and even government debt just slightly out the curve beyond the three year point will give them some sort of yield pickup.

Okay. Thanks Chris. Question from Matthew Mulcahy at Macquarie and it's basically: There's been strong demand for Australian government bonds, particularly at the long end because the Australian curve is relatively steeper versus its global peers. If the RBA launches full blown QE now and flattens the curve, does this work against the increased demand and force the RBA to buy more of the supply? Like if the curve flattens, are we going to see less demand for longer dated government bonds?

I don't think that's quite the right way to think about it. If the (Reserve) Bank was to pursue a QE program where they're buying a regular amount of government bonds further out the curve, the way I think about that is that's additional demand coming into the market. And that additional demand is pushing up the price and pushing down the yield and some investors which will be buying those funds off, may be encouraged to take their money elsewhere, investing in other assets. That's true. So the share of other investors in the market will decline to the extent we've bought a bond that has to be true, but I don't think that forces other investors to suddenly up and leave the market. And somehow, we have to keep coming in and sort of absorb a larger and larger share of the market. We're just adding to demand, so demand has to go up, price has to go up and therefore the yield has to come down.

In terms of flow, where we saw, in terms of the relative value place investors will look at it and say, well, that the relative value argument of adding to say, let's call it a 10 year point of the curve in Aussie becomes less with those yields coming down and the spreads, they're going negative to the US. And I suggest we saw some reaction to that move post the recent speech by Governor Lowe, when we saw that, a large flattening in that 3s, 10s curve. So we saw a number of offshore investors selling out, and that's the potential where we do start to see if that bond buying in the ten-year part of the curve moves it dramatically enough that offshore investors find the relative value argument unattractive to add to Aussie. It might be where Matt's pointing to that does that imply that you need to buy additional to cater for that lack of demand that potentially gone from offshore.

Well, I just wouldn't call it a lack of demand. We've come in and added to demand and foreigners have sold to us, and they might be inclined at lower yields to invest in other assets, including non-Aussie dollar assets. So that's partly how you get the exchange rate effect that is part of that, one of the effects of such a policy, if we were to pursue it.

Okay, interesting. Quick question from Adrian [Janchek] and he says, and this is for Chris. Do you think the use of TFF might conceivably lower lending standards and therefore create its own financial stability risks?

No, I don't. The TFF is just replacing more expensive sources of funding and banks are passing on that through lower borrowing costs. I don't see that it would be a strong motivation for significant decline in lending standards. And I think as it has been suggested already in our discussion today, by the members of the panel, I think one of the things that's more likely to constrain the growth of credit is demand, particularly on the business side of things, that's a reflection of the uncertain economic environment we're in and businesses are cautious about pursuing investment opportunities.

Thank you. Any other questions or we can wrap it up there if there aren't any. Okay. Well, thank you, Chris. And thank you to the panel and thank you to Fitch and ANZ and Citi for sponsoring today's roundtable, and to the webcast, and to hear the keynote speech from Dr Christopher Kent. Thank you so much indeed everybody.

Thanks you John. Thanks, everybody.