Apr 07

Government Bonds and interest rate movement

The above government bond yield curve shows how the yields have changed across the different terms from early February to today (before the RBA’s decision). The 1 year yield is still around 2.60% indicating the market expects the RBA to drop rates to around 2.5% by July 2009 but the interesting part is how the yields have increased from maturities of 2 years and above. With the Australian government’s fiscal stimulus packages and expected capital raising from bond issues, the market is demanding a higher premium from the government and yields have increased by around 0.50% to 0.75% for all longer term government debt issues.
From an investment perspective this increase in yield over the last 2 months would have dampened bond returns significantly. But with the economy still deteriorating perhaps the yield curve movement is a little overdone and maybe now there’s a buying opportunity???
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