 Welcome back to Money Exchange. Well, it's the biggest financial market in the world and demand for sovereign bonds can often lead to significant swings in currency values. Joining us from our Sydney CBD studio to tell us more is Simon Michele from FIG. Simon, welcome back to Money Exchange. Good to be with you, Andrew. Well, we had an historic day on the financial markets here in Australia this week with the release of the first 30-year Australian government bond. Tell us a little bit more about that. Yeah, look, really positive development for the Australian bond market and what it does is extends the length of borrowing for the Australian government. Previously, they've generally issued 10-year bonds. In this very low interest rate environment, it makes sense to lock in those low rates for a longer period and so now the Australian government has issued its first 30-year bond. Strong demand as well. We had bids of about $13 billion. We've issued $7.6 billion. And the interest rate for 30 years for Australian government bond is 3.27%. Well, it seems like it's a pretty good deal all around. One good for the Australian government and good for investors because I was doing some research this afternoon and I saw that for the same 30-year bond in Japan, they're paying at the moment 0.53%. In the US, it's about 2.5% and the UK 1.7%. By all assumptions there, it looks like it's a pretty good deal. Look, very attractive. And don't forget, Australia is still one of the very few countries to have that triple A rating as well. So very attractive and, you know, we still have vast amounts of quantitative easing and bond buying going on by central banks around the globe and that money's got to find a home and Australia is a pretty attractive place for investors at the moment with those rates. So this sort of bond issue, Simon, is this likely going to help support the Aussie dollar? Well, it's really interesting. I mean, what it does is it lengthens the curve and it allows not only the Australian government but also Australian corporates to be able to issue longer-dated debt. That's very positive for infrastructure debt, for example. Look, I think the main driver is really the fact that Australian interest rates are at a significant margin above the US. So what the RBA would like to see is to see the US make that move of increasing their interest rates and just lower that differential. And that's really forced the RBA to have to lower the cash rate this year, that delay in the US moving higher and try to lower the value of our interest rates in comparison to the US. So the demand for this new 30-year bond was it mostly local institutional investors or was it international or what sort of percentage are we looking at there? Well, interestingly, 65% of the bond issue was sold to offshore investors. Now, that's slightly below the levels about 2012, where we had around about 75% of Australian government bonds held by offshore investors, but it's higher than where we are now and as the level of issuance by the Australian government has increased, the share held by offshore investors it's now down about 58%. So for those uninitiated to the bond market, I guess for those international investors 3.27% might seem like a pretty good return when they're virtually getting nothing in the bank, but the real risk for them is the Aussie dollar depreciates in value, am I correct? That's right, absolutely, absolutely. So they'd be looking not only at the return that they're getting by their interest rate, but they would be looking at that currency movement as well. So they've got to make sure perhaps the US Fed stays on the sidelines for the time being. Give us your thoughts about Fed tightening. Are we going to see them tighten in December? Futures markets are about 70% at the moment. They certainly are, absolutely. I did check that before I came down. Look, I think the Fed's certainly positioning to look at a year ago. They missed that September. They went in December. I think it's really important that they do send that message to the market. I think the election obviously caused a little bit of uncertainty. As those polls have widened, the volatility sort of softened down a little bit, but I think Janet Yellen will be waiting to see the result of that election before she gets to vocal out there about increasing rates. But they've been positioning us really throughout the last six months and the US will move. I'd be surprised if they don't move in December, I think, Andrew. So if we are going to see a Fed move in December, are we likely going to see an activity of pricing in that expectation with a lower Aussie dollar between now and December? I mean, we've recently been moving a little lower this week. The momentum seems to be there. Is that likely going to continue in the coming months? Well, it's been interesting. The focus rates have increased significantly, as you mentioned at the start of the program. So what we tend to see is, as you get that pickup of an additional 30-40 basis points, that you get that flood of demand coming back in. And that's certainly what we've seen with that huge demand for that Aussie 30-year bond auction. And also in the US, they also did a 30-year auction and they had the highest demand for that auction since July. So if you're looking at what investors are doing, they're certainly very happy to lock in 30-year rates in this low-rate environment. So they would tend to suggest that they don't fear significant upward movement in interest rates in the short term. So I think you've got the Fed certainly positioning and messaging about high rates. The market may be not really seeing that reflected in the long end of the yield curve. I think as far as demand's concerned, you know, as those rates move up, you're likely to see that increased demand for the Aussie dollar as people take advantage of that. We've certainly seen that in the short term over recently too. Kray and Wheeler in New Zealand, he suggested that he may lower rates in coming months. What about the RBA with our new Governor Low? What's influencing the RBA's thoughts at the moment? Absolutely. And I think we've seen this message from a number of central banks which is that the central banks have been using monetary policy, have been lowering rates. They're getting to the state where they're really having an impact. And they've started to suggest that, you know, it's about fiscal policy and there needs to be a tightening of fiscal policy. They need to help with that action by the central banks. We've heard that from the ECB, the US and also from our RBA here. You know, I think that a couple of months ago, the Aussie two-year rate was down about 1.4%. Our official cash rate is 1.5%. That's now up about 1.7%. So if you look at the market, we don't see any lowering of the cash rate by the RBA in the near term. However, a lot of commentators are certainly suggesting that rate will have to fall. And I think it's really going to be driven by the US. If the US continues to delay increasing interest rates, it's going to certainly place more pressure on the RBA to have to lower theirs even further. Wow. It just boggles my mind. Five years ago, if we ever talked about here in Australia having 1.5% interest rates, we all know that there's been an increase in demand for inflation indexed annuity bonds. Share with us a little bit about that. Absolutely. So in this very, very low rate environment, as you mentioned, rates are around 1.5% to 3%. Investors have one or two choices. They can sort of take on more risk or they can adjust their lifestyle or adjust their expectation on that return. But one of the options that we're certainly seeing increased demand for is at a level of certainty provided by annuity bonds. Annuity bonds are issued by solid infrastructure projects such as the County Court of Victoria, the Southern Cross Rail Station and Schools Project here in New South Wales. And they provide an ability for you to access your capital over the life of the bond. So it's really about putting your capital to work so you can increase the level of return you're getting off your investment over and above just the pure interest rate return. The other thing about those is they have a preset repayment schedule. So when you buy an annuity bond, you know exactly what payments you're going to get over the life of that bond and you have that added protection of inflation indexation. And what that does is protects the capital you have invested against the impact of inflation because it increases the value of your bond every quarter at the same rate as inflation. But it also protects that income stream, that coupon and that's being calculated against that increasing value. So it's really positive in this environment. It allows investors to be able to lock in an income stream that they know would better meet their expectation. Simon, I talked to a lot of mum and dad investors that have heard about the bond markets. They know about the bond markets and many of them would like to learn more about it and in fact even invest independently in the bond market. If I'm watching the program tonight give them some advice on where they can start and what should they look for perhaps on your website. Absolutely. So if they go to our website there's a lot of educational tools and resources for people to be able to get more confident and get more familiar with the bond market. The bond market has been around for hundreds of years. It just has not been accessible for mum and dad and individual investors up until the last five years. So I say to mum and dad investors you can now go direct you can buy the same bonds that the bond funds buy and get the same protection such as a fixed maturity date knowing when you're going to get your money back and fix coupon streams, knowing what income you're going to generate from that investment, far more lower volatility, a little bit more certainty of outcome. So jump on to FIG's website check out the educational details give us a call and have a bit of a chat and we'll reintroduce you to a very traditional asset class. Fantastic, Simon Thanks so much for your time tonight, really appreciate it. Thank you, Andrew.