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Jun 24

Australian Government Bond Yields…pretty much flat

Well, flat, it pretty much is. What a difference a couple of months can make…from a nice gentle normal looking yield curve to very very flat out to five years to maturity. Pretty obvious stuff here…housing has slowed, inflation isn’t a perceived threat, the Euro crisis has global recession potential written on it, and the US continues to be a near basket case. We re lucky we are a resources rich country for if that wasn’t the case this yield curve would be looking decidedly negative. Our two-speed economy has effectively levelled the yield curve out ad its an each way bet as to whether our economic growth will move above trend or continue its ‘at trend’ way.

Markets are a very tough pick right now. Volatility should continue to be the trend in equities (so if the VIX drops its bound to be a decent buy) and interest rates are likely to be fairly stagnant so a tough sell (although term deposits continue to be quite good given their continued premium over bonds). Australian property trusts appear correlated to both the weak Australian residential market and volatile equity market, and global property has run up so fast that its difficult to see further price growth. Aside from the volatility play I continue to think purchasing Chinese Yuan may be attractive over the long-term and it may be worth looking for some decent global macro hedge funds…I’d certainly want to diversify across them as if they get the next movement wrong then it could always be “ouch”.

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