Summary:
Australia’s economy grew 0.6% in the June quarter, beating forecasts and lifting annual growth to 1.8%. The upside surprise was driven by strong household consumption, underscoring the resilience of the economy despite global uncertainty. The figures complicate the Reserve Bank of Australia’s policy outlook. After three cuts this year, further easing is less certain given solid demand, a tight labor market, and sticky inflation. Bond yields rose to six-week highs, while the Australian dollar edged higher. Analysts now see reduced scope for aggressive cuts, with at most one more expected this year or in 2025, as the RBA balances growth with inflation risks.
The 4.34 per cent yield on Aussie government bonds is also 27 per cent higher than their average yield since 2008 and superior to the average 4.14 per cent yield since 2000. Locking in these yields can yield significant profits – and provide portfolio insurance – in the event of a recession or crisis that warrants deep interest rate cuts.
This is particularly true if you are doing so via an investment that has no credit risk, such as a risk-free government bond with the highest possible AAA credit rating.
The flip side of this coin is that a fixed-rate bond will suffer large losses if these long-term interest rates climb a lot further. And the truth is that there are many good reasons as to why debt investors are demanding elevated fixed rates right now.
Figure 1: Aust. 3 yr minus 10 yr Bond Spread
Figure 2: Australian & US Bond Yields
Figure 3: US 10-year minus 2-year Bond Spread
