The Aussie Bond Curve Is Signalling Tough Economic Times Ahead

The Australian Government bond curve is inverted. That means that in contrast to the usual situation, and the time value of money theory, that the rates on longer bonds are lower than the rates on shorter maturity bonds.

While not unprecedented in Australia, it’s an unusual situation and one which Chris Weston, IG Markets’ chief market strategist, told Business Insider “is a major negative and suggests worrying times ahead for an economy.”

But Deustche Bank, in research released earlier this week, addressed this very question, noting that it may not be all bad news.

“While the two negative quarters in GDP since 2000 have been preceded by an inverted curve, we’ve also seen the economy accelerate as the curve has flattened and inverted,” the report titled Australia: The yield curve and the growth outlook said.

So there does seem to be some linkage between curve inversion and growth but then the economy accelerates again.

This lead Deutsche to conclude that “the ACGB curve doesn’t seem to do a great job informing us about the growth outlook”. This, they say, is because Australian bonds are driven by a “combination of domestic and global considerations.”.

Chart: Bloomberg Terminal

But it is worth exploring Weston’s point about “worry times” ahead for the Australian economy in light of this research.

Arguably it is Deustche’s very combination of local and international events, weaker domestic growth, lower inflation in Australia, rising deflation in the globe and weaker global growth which has caused the Australian bond curve to invert.

Bond traders in Australia are telling us something and it’s not good news for global or local growth.

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