Australia: Some of the increase in bond yields is here to stay

We have revised up our forecast for long-term bond yields in several advanced economies – most notably in the US where yields have been lifted by 50 basis points in our forecasts.

Bond markets have moved around sharply this year and we think a good deal of the spike in yields will be unwound in time. Nevertheless, some of the increase is driven by changing fundamentals, which warrants a change in our outlook.

This research report expands on the following points:

• Our forecasts for bond yields in several advanced economies have been revised higher. Australia is no exception – we have lifted long term yields by 50 basis points to reflect both higher global yields and the increased term premium that has emerged over the past year.
  
• Australian yields have risen over the past 18 months due to more hawkish expectations for policy rates in the future and a higher term premium. As is the case overseas, we think that markets are currently overstating where policy rates will ultimately settle and expect yields will come back from their current level in time.
  
• We think there are good reasons to expect term premia will remain around their current level in Australia. Inflation has spent more time outside the RBA’s target range than in it over the past decade, and supply shocks are expected to continue generating inflation volatility in the medium term. This adds to the premium investors will demand for holding long-term debt.