Oct 21

Australian Government Bond Yields…little change in a month but…

Aust Government Bond Yield Curve - 18 Oct 2013


Source: RBA & Delta Research & Advisory

The above chart shows very little change in Australian Government Bond yields over the last month which given what’s been happening in the US seems a little surprising. We’ve had massive fund managers losing confidence in the US Government and selling out of Treasury bonds and there was an 11th hour agreement to stop the US defaulting and sending the world’s financial markets and economies into a potential tailspin. Whilst it didn’t happen, the doubt created is real and there could be repeat in just a few months time so you would have expected a greater change in government yields particularly as they are typically a very good economic predictor…whether it be future inflation or economic growth in Australia.

However, the following chart does show what really happened over the last month…and it turned out there was some volatility in yields…peak to trough within the last month was around a 35bps movement which is quite a reasonable movement. So the change in the yield curve above is clearly not a strong reflection of the recent uncertainty but it does tell another story…

Changes in Aust Gov Bond Yields - 18 Oct 2013

Source: RBA & Delta Research & Advisory

…that is….the fact that the 1 year yields are above the cash rate for the first time in a while…in fact I believe it was around the middle of 2011 before the Euro crisis changed that. Now with a normal-ish looking yield curve (i.e upward sloping), it suggests that the cash rate may be stable to rising over the next 12 months (not necessarily up because there should be a “term” premium for holding the bond for 1 year or more). However, with the Australian dollar at an uncomfortably high 96 US cents at the time of writing, the RBA may struggle with doing nothing to the cash rate and particularly given their expectations are for continued below trend economic growth due to the end of the Resources Investment Boom. On the flipside to the lower argument is the fact that the current cash rate of 2.5% does have downside limits (obviously can’t go blow zero) so going lower without a crisis may unnecessarily use up too much of the RBA arsenal which may be needed given the potential for an overseas-led crisis (could be Euro, China slump, or US debt ceiling crisis Part3) plus there’s the fact we have super high housing costs in Sydney, Perth, and Melbourne (I honestly don’t know how so many people can afford to live there) that may be further fueled by low rates. Whilst lack of supply may be a contributing factor, as an interstater, “value” in housing does appear to be thinly disguised so bubble or no bubble, high house prices could create another problem for the RBA. Either way, there are numerous arguments for both sides of the rates equation.

One thing’s for sure, the recent US debt ceiling debate will ensure there’ll be no tapering of the QE3 so sharemarkets may continue to be artificially boosted and the yield curve suggests that locally there’ll be low interest rates, low inflation, and low economic growth for some time yet.

Housing Prices

Source: RBA


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