Australian Government Bond Yields Fall

There’s been so much talk about European government bonds lately – as the IMF considers loaning money to Italy and all – but let’s get back to Australia, where 10-year government bond yields are plunging. Check out the chart below. Australian government bond yields are under four per cent, and headed in the complete opposite direction of bond yields in Europe. There are two important aspects to this story.

Yields down, prices up

Yields down, prices up


The first aspect is that fixed income securities probably belong in your portfolio strategy. This is precisely the issue we discussed a few months back when we introduced our version of Harry Browne’s “Permanent Portfolio” idea in Australian Wealth Gameplan. Our basic argument was that fixed income is under represented in Australian retirement plans.

Even more basic than that is the fundamental principle of the Permanent Portfolio: ignorance. Allocating your assets in four broad categories and rebalancing them is an admission that you have no idea what the future will bring. That seems like a safe admission to make all the time, and especially these days.

Of course we can’t help being troubled by the idea of buying Australian government bonds. It just feels dirty. And in any event, corporate bonds are killing it lately. The global government debt crisis has led to the historically strange situation where corporate bond yields are lower than government bond yields. Why? Some corporations – with real assets and durable cash flows and transparent liabilities on the balance sheet – are much better credit risks than most governments.

In tomorrow’s Markets and Money, we’ll bring this entire conversation back to Australia. The dreaded “L” word has made its way back into the bank sector. It’s forced the Reserve Bank of Australia to develop a convoluted plan to ensure a normal credit market in the event of a global crisis. Tomorrow, we’ll show you why it’s bound to fail.

Also, a big thanks to everyone who made it to the Doomers’ Ball on Friday at the Windsor Hotel. As far as we could tell, a good time was had by all. We had readers from every single Australian state, as well as readers who travelled from New Zealand and America. We also promised we’d use today’s DR to make the presentation we meant to make Friday. Stay tuned for that this week.

Dan Denning,
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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