Australian government bonds fell for four days last week, driving the 10 year bond rates up 0.30% to 4.97% on Friday, the highest since early last October.
The rise has come despite the Reserve Bank keeping the cash rate steady and forecasting the economy to slide to an annual growth rate of -1.5% in the year to June.
That would normally be good for bonds, but the rise of over half a per cent in three weeks has given bond investors losses, and started stirring fears (which are also surfacing in the US, UK and German bond markets) about inflation and the huge volume of bonds to be sold globally to pay for the various expansion plans.
Here, bond yields have risen as more leaks have flowed from Canberra about the budget, the size of the deficit and the fall in government tax revenues.
The government’s admission that it could face seven years of budget deficits stirred bond investors to more gloom.
We will know tomorrow night when the 2009-10 budget is brought down.
According to estimates from NAB economists, the federal government’s debt burden could hit 15% of GDP by 2012, which would be the highest since 1995 and the last year of the Keating Government. That could be around $180 billion.
Federal Treasurer, Wayne Swan said last week that the global slump will probably cut more than $200 billion from government revenue over four years.
The Reserve Bank said on Friday gross domestic product will shrink 1.25% in the 12 months through June, reversing its forecast for growth of 0.25%.
That compares with the IMF estimate for a fall of 1.4% in calendar 2009.
Friday’s auction of $702 million in 10-year bonds received bids for 3.8 times the debt on offer, compared with an average of 3.6 times in sales for various maturities since February.
That’s a sign there’s still an appetite for government debt from investors still worried about the stability of markets, especially equities.
The Reserve Bank Governor, Glenn Stevens used the ‘R’ word last month in a speech in Adelaide and conceded that if looked like a recession, and felt like a recession, then Australia was in recession.
On Friday we had that confirmed in the first official forecast of a recession from the authorities, and it came four days before the 2009-10 Federal Budget on Tuesday night.
And despite solid March retail sales, building approvals and those ‘rubbery’ jobs figures for April (seasonally adjusted, not trend, which shows unemployment continuing to rise), the RBA now believes the Australian economy will slide by 1.25% in the year to June, 2009, with most of the plunge happening in this half of the year.
The bank had previously forecast a small 0.25% growth rate for the year to June.
It also sees inflation easing slowly this year (and there is a detailed explanation why), before falling faster over 2010.
Despite the forecast of negative growth, the Australian economy will be doing better than Japan (down around 3.3% over the next year, the US down by around 3% after a 6.1% annual slump in the March quarter and Europe down by around 4% or more in some countries over the rest of 2009, and more in Ireland and 3.8% for the UK).
In its latest monetary policy statement, the RBA said this morning that growth in the year to June, 2009 would be 1.25% for the year to December this year (i.e. calendar 2009) and it would fall 1%. In the year to June 2010, the economy is forecast to grow by 0.5%, and in calendar 2010, the growth figure is estimated at 2%.
Growth in the year to December 2008 was 0.3%, after an earlier forecast of 1% in the February 2009 Monetary Policy Statement.
As growth rose 0.1% in the September quarter last year and then fell 0.5% in the December quarter, the RBA believes growth will plunge by over 1% in the current six months (or 2% annualised).
There is a slow rise expected in the final quarter, while the 2% growth figure in the year to December 2010, indicates there will be a substantial rise expansion, more so than apparent from the bank’s statements.
In fact if Australia achieves growth of 2% in calendar 2010, it would be the best for three years. That might be a tepid rebound, but it could very well be stronger than that experienced by many of our trading partners.
Non-farm growth is forecast to fall 1.5% in the year to this June and 1% over calendar 2009, before recovering over 2010.
The fall in non-farm growth will reflect slowing construction (housing) and the fall in our terms of trade from falling export income.
Inflation is forecast to fall to 1.5% in the year to June this year, before rising to 2% over 2009 and 2.5% in the year to June 2010.
Underlying inflation though is expected to slow this year and to be running at an annual 2% or so in the back half of 2010.
The central bank left its bias to cutting interest rates in the latest Monetary Policy Statement, making a more detailed explanation after outlining the new approach in the post board meeting statement on Tuesday by Governor, Glenn Stevens.
"With interest rates at historically low levels, and some signs of stabilisation in the world economy, the board has recently viewed it as appropriate to make small and less frequent adjustments to the cash rate than was the case up until February when conditions were deteriorating rapidly," it said in its quarterly statement on monetary policy released on Friday.
"In assessing whether further reductions are appropriate over the period ahead, the board will continue to monitor the
