Australian bond yields hit rock bottom

  • Australian government bond yields have fallen to record lows.
  • The continued decline in yields reflects a number of factors, including expectations for Australian economic growth and inflation in the years ahead, the outlook for the global economy, along with monetary policy settings from the RBA and other major central banks.
  • On Friday, longer-dated US government yields fell below shorter-dated three-month yields for the first time in 12 years. This has often occurred before US recessions in the past.

If the latest signals from Australian government bond yields are any guide, the economy could be in for a rough period in the years ahead.

They’ve fallen to the lowest level on record.

The benchmark 10-year government bond yield sits at 1.769%, nearly 50 basis points below the high of 2.21% struck earlier this month.

While that partially reflects market expectations for Australian economic growth and inflation in the decade ahead, the latest leg lower was driven by global forces with soft economic data from the United States and Europe increasing concern the slowdown in the global economy late last year and early this year may not be a temporary blip.

Concerns for the outlook for the global economy has also seen speculation over the potential for further or renewed asset purchases from major central banks increase, further depressing long-dated bond yields as a consequence.

On Friday, benchmark 10-year US government note yields fell below those for three-month US treasury bills for the first time in 12 years.

Inversions of this part of the US yield curve — where longer-dated yields trade below shorter-dated equivalents — have occurred frequently before US recessions in the past, raising understandable concern among investors that a similar outcome will occur on this occasion.

Like benchmark 10-year Australian government bond yields, three-year yields — more reflective of expectations for monetary policy settings in the period ahead — have also fallen to record lows below 1.4% in recent trade, indicating a growing belief among markets that weak inflation and economic growth will force the RBA to cut official interest rates in the months ahead.

The recent decline in both Australian three and 10-year government bond yields can be seen in the chart below from Thomson Reuters. The former is shown in orange with the latter in white.

Thomson Reuters

An increasing number of economists now see the RBA delivering not one but two 25 basis point cuts to Australia’s cash rate this year, leaving it at just 1%, also a record low.

Financial markets also share a similar view, fulling pricing in one 25 basis point cut this year, with the risk of a second also being factored in.

Should concerns about the outlook for the global economy be representative of what lies ahead, with Australian economic growth already sluggish and inflation pressures weak and well below the RBA’s target, it will only increase the belief the RBA may have to ease policy even more aggressively in order to help support economic activity.

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