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Aug 23

Australian Government Bond Yield Curve – August 2010

Source : RBA

The above chart shows the Australian Government Bond Yield curve the day after each of the RBA’s interest rate increases this year (i.e. 4 March, 8 April, and 6 May), the end of the financial year and through to last Friday. Since 8 April the yield curve has continued to flatten suggesting the outlook for our economy isn’t quite what it was. With the European sovereign crisis still hanging around (Spreads of the high risk Euro countries have started widening again), poor economic data coming out of the US, and China’s rate of growth slowing the international economic environment is looking decidedly weak. Locally, the RBA’s own fiscal tightening has reduced any expectation of inflation and there are signs of our housing market slowing (e.g. weak levels of home loan approvals). All in all there are many risks in the system and it appears our government bonds have been in strong demand so much so that the yield is below the current cash rate for maturities that are up to 3 years away…so much for the term premium…unless there is the expectation of lower cash rates and a weaker economy.

Maybe or maybe not…but either way at this point in time the market is not too convinced of a great deal of economic strength or inflation…so there appears to be a static cash rate for the moment.

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