The above government bond yield curve shows how the yields have changed across the different terms from early February to today (before the RBA’s decision). The 1 year yield is still around 2.60% indicating the market expects the RBA to drop rates to around 2.5% by July 2009 but the interesting part is how the yields have increased from maturities of 2 years and above. With the Australian government’s fiscal stimulus packages and expected capital raising from bond issues, the market is demanding a higher premium from the government and yields have increased by around 0.50% to 0.75% for all longer term government debt issues.
From an investment perspective this increase in yield over the last 2 months would have dampened bond returns significantly. But with the economy still deteriorating perhaps the yield curve movement is a little overdone and maybe now there’s a buying opportunity???