Reserve Bank warns ‘periodic disruptions' to debt markets are likely amid bond glut
Surging government borrowing across the world could push up interest rates and investors have been told to brace for repeats of the April volatility sparked by Donald Trump's trade chaos.
Reserve Bank head of domestic markets David Jacobs warned investors to prepare for 'periodic disruptions' amid ongoing uncertainty overseas.
But he said Australia's bond market — where governments and businesses borrow cash — should be strong enough and flexible enough to overcome any pressure.
Interest rates on US government debt rocketed after Mr Trump's tax hikes on trade and the squeeze was widely cited as the reason his administration swiftly back-flipped on the worst of the proposals.
While central banks like the RBA and US Fed set benchmark interest rates, there are many other factors that impact rates for borrowers across the market including businesses, banks, and ultimately, homeowners.
'Events in early April were somewhat dramatic, though brief, and illustrated how changes in the global economic system will play out quickest in capital markets,' Mr Jacobs said at the Australian Government Fixed Income Forum in Tokyo.
He said markets had quickly steadied but only after the US paused the tariffs.
'That suggests little room for complacency,' he said.
'Much as international trade may be diverted in a new economic order – so too might international capital.'
That might mean investors worry about Australia's position as a free trade nation and relationship with China in a world moving towards tariffs and protectionism.
Yet Australia may also remain an attractive place to send cash because of strong institutions and a great credit rating.
There has been a sharp increase in government borrowing in the aftermath of the COVID-19 pandemic and amid giant doses of stimulus pumped into major economies.
Australian Federal Government net debt is set to hit $620 billion by June next year, about double the level from a decade ago.
Mr Jacobs said increased borrowing and central banks stepping back pandemic-era operations meant more bonds were hitting the market — which had been labelled a 'global bond glut'.
That means governments may need to pay higher interest rates on debt, potentially pushing up borrowing costs across the economy.
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