At the Thomson Reuters Australian Regulatory Summit held yesterday in Sydney, Guy Debelle, assistant governor at the Reserve Bank of Australia, considered the turnover ratios of government and corporate bonds, and the types of investor targeted by the local bond market. While conceding that there was more of a buy-to-hold approach across the board, Debelle concluded that there was sufficient stock to ensure continuing liquidity. Giving an overview of some factors affecting Australian fixed income markets, and drawing on work done by his colleague Jon Cheshire, Debelle noted that liquidity in most segments of the physical bond market in Australia was lower than in the past.  "These changes are partly a response to regulation and partly a reassessment of business models by banks," he said. Debelle said Australian bond markets still relied on market makers with "a dominant presence" in the markets, and cited AFMA data showing that banks account for around 45 per cent of all trades in the Australian Government Securities market, although this is down from the 60 per cent or so in the decade to 2011.  Banks' share of transactions in non-government bond markets has declined slightly from 50 to 45 per cent. This comes after a flurry of "participation" by foreign banks in 2010 and 2011, partly in response to increased demand from their offshore clients. Debelle said the trend had reversed more recently. "As a result, while bond markets are currently larger (relative to GDP) than in the past, the foreign bank presence is a little smaller than it has been at some times in the past," Debelle said. The decline in the presence of foreign banks reflects both a change in business strategy and, in some cases, the effect of regulation. And, just as has happened in the larger fixed income markets offshore, banks operating in Australian bond markets have changed their business models.  This trend also reflects incentives for Australian banks to hold government bonds to satisfy the Liquidity Coverage Ratio, holdings that have increased to around 30 per cent of the market.  The RBA's judgement is that a greater holding than 30 per cent may impair the functioning of the government bond markets.  "In coming to that assessment, one of the considerations is the sizeable share of government securities held by offshore investors," Debelle said. In the case of AGS, this currently amounts to more than 60 per cent of the stock. "Many of these investors are buy-and-hold investors. They generally do not undertake securities lending.  "As a result, these bond holdings are not contributing to the liquidity of the market. Hence, a more relevant metric in considering the share of the government bond market that banks can hold to meet the LCR is the stock of bonds held by domestic investors." Last week, the RBA published its latest assessment of the amount of AGS and semis that could be reasonably held by the domestic banks without impairing market functioning. APRA then sets the aggregate size of the Committed Liquidity Facility as the difference between the LCR requirements