Mar 03

Australian Government Bond Yields – Pretty Quiet…and other thoughts

I haven’t posted too often this year and the above chart pretty much shows why. This year, there hasn’t been too much change a not a great deal of interesting things to write about. Despite natural disasters, minority government, middle east issues, record food prices and climbing oil prices, our bond yields have been relatively stable and ‘normal’ looking.

Even the short part of the curve has been relatively stable this year as the market has pretty much agreed that the Reserve Bank is more likley to keep rates steady until at least the latter half of this year. This ‘normal’ looking chart suggests the continued strength in the Australian economy and despite very high food and energy prices, inflation is not of major concern at this point in time.

Risks to our economy continue to revolve around our reliance on strength of China’s economic growth and our property prices holding up. The Euro-sovereign crisis appears to have been forgotten by the newspapers but Portugal is looking like following in Greece and Ireland’s footsteps and will probably require a bailout some time this year as their yields continue at record highs with 10 year bond yields around 7.5% (many economists believe 7% yields are unsustainable borrowig costs for the Portuguese). Markets continue to be complacent about the Euro-Sovereign issue as its banking system is far from strong and is incredibly weak.

Anyway, aside from going long the Renmimbi, I believe the best trade for the year will be going long the VIX when it gets towards mid-teens as there is little doubt that, just like the last couple of weeks, as soon as it gets there some market shock will result in the VIX moving up 30% or more for a nice little gain. Volatility strategies are a must for any multi-strategy fund or portfolio.

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