First post in a while and the first for the new year, so I thought I’d start with a popular favourite…the Australian Government Bond Yield Curve. The above chart shows the changes in the yield curve over the pas 12 months and it certainly has been an interesting ride. Equities have been largely out of favour thanks to 12 months of European Sovereign concerns putting pressure on the global financial system, but the local economic outlook has shown signs of improvement that has resulted in the shorter term interest rates increasing. Whilst the yield curve is not as steep as it was at the end of 2009 it has certainly steepened over the last 6 months as concerns around a double dip recession in the US subsided and the ECB stepped in to save Ireland.
Moving forward the Euro Sovereign Crisis will continue to place pressure on global financial markets and with Portugal going to the market this week to raise a few dollars I believe this may be a key week in determining global investor psychology in the short term. Portugal’s bond yields are at record highs (~7.1% for a 10 yr bond) and if the auction results in higher yields then I think we’ll be in for a bumpy ride in both equity and bond markets. The newspaper talk has been incredibly bullish with what appears to be every analyst in the land predicting double digit sharemarket returns this year…hopefully they’re right but let’s not forget these Euro issues and the fact that there are many near insolvent US state and municipal governments that will be holding the global recovery in the lower gears. Our economy looks like it will continue to rely on China and whilst the Queensland flood recovery will help some industries (construction) the damage is bigger for others (agriculture and mining).