RBA Flags Offshore Risks as Bond Rates Reach 15-Year Highs

The Reserve Bank of Australia's (RBA) latest Financial Stability Review highlights offshore risks to financial stability, rather than domestic concerns. The review notes that Australia is a heavily indebted nation but remains asset-rich and fully employed, with no systemic risks currently posing from domestic cyclical developments.

However, the RBA is increasingly worried about global events. A significant surge in bond rates has reached 15-year highs due to expectations of sustained elevated policy rates to curb inflation and robust competition for capital from artificial intelligence 'hyperscalers'. This rise in yields increases interest payment costs, potentially limiting governments' capacity to respond to future downturns.

The RBA also notes that the bond market's investor base has shifted, with central banks and foreign currency reserve managers retreating, replaced by more price-sensitive buyers. Despite this, equity markets have shown unexpected resilience, attributed to strong profits from large tech and energy companies, alongside sustained optimism surrounding AI investment.