Certainly an interesting 12 months has transpired in financial markets. The above chart shows the movement in the AUstralian Government Bond yield curve and this time last year the sever downward slope indicated the market was expecting the Reserve Bank to drop interest rates to below 3% during 2009. Clearly that didn’t happen but there was a rapid decline down to 3% which was maintained until the last few months.
The yield curve was incredibly steep at 22 Jun 09 indicating an expected strong economic bounceback, however over the last six months the longer term yields have dropped suggesting the economic outlook has subdued a little. What we are left with is still a strong upward looking curve which is a good sign for economic prospects and the market appears to expect continued interest rate rises by the Reserve Bank. However, with a one year government bond yield of approximately 4.25% the expectations of the level of interest rate increases appears to have diminished a little so there’s no guarantee of a rate rise in February but a good chance of a 25bps increase in March or April.