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Sep 16

Australian Government Bond Yield Curve…still dropping

Source: Reserve Bank of Australia

I’ve just updated my last yield curve from just over two weeks ago and as the above chart shows yields have dropped another ~40bps since then. This is an indication of the lack of global stability driven out of Europe and US and a resolution to their issues is clearly a long way away. That doesn’t mean markets will necessarily continue to drop but it is difficult to see any catalyst that will create a sustained market rally.

This curve suggests a very strong chance of an interest rate drop from the RBA is not too far away and according to the ASX Interest Rate Tracker, latest figures suggest a 57% chance of a 25bps drop next month. Whilst I would like to see a rate drop (would certainly help my mortgage payments), and despite reports that CPI figures were downgraded (the ABS announced yesterday that they weren’t), I’m not so sure it is going to happen. The Reserve Bank takes a 3 year view on inflation and last week’s announcement that Terms of Trade figures were up in the June quarter may influence their higher inflation outlook, so I believe the RBA will keep rates steady. The one issue that may change this will be a European-driven banking crisis that freezes the inter-bank market…there already is a banking crisis (all sovereign crises are banking crises), but there are potential signs of credit issues (a few French bank insiders are talking about their own bank’s struggles), but hopefully the ECB et al can ensure it doesn’t happen.

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