Jun 12

Australia’s Steep Yield Curve

An incredible steepening of the yield curve has occurred throughout 2009. As can be seen the latest 10 year bond yield isn’t too far from where it was in the middle of 2008. This yield curve tells us several things about the state of current markets and economy…

  • the market is starting to think that the next RBA move will be an increase in interest rates and not a drop…the 3 month yield is only 2.95% versus the 3% cash rate and longer term yields are above 3%
  • The steep normal looking yield curve is typically a sign that Australia’s economy is looking up and this steepening has increased throughout the year in line with increasingly positive news
  • The sharp increase in steepness has happened so quickly….does this mean that bonds are oversold?

Overall this is a good looking positive yield curve despite global economic news continuing to be mixed. We are still in the ‘green shoots’ phase of a global economic recovery so this steep yield curve looks to be a relatively attractive buying opportunity to me.

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