Beware the bond market trap

Co-founder of the Switzer Report
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Last week’s Reserve Bank of Australia (RBA) Board Minutes gave further heart to those expecting another cut in interest rates. Central banks don’t get much more explicit than: “Members considered that further easing may be appropriate in the period ahead.” My bet is that they will cut again in December to try to take some pressure off the Australian dollar and give the domestic economy some pre-Christmas cheer – notwithstanding ongoing signs of a pick-up in the United States and optimism about China.

However, at some stage, the interest rate cycle is going to turn around and the great bull market in bond prices will end. As the 10-year Australian Government bond yield chart shows, it has been pretty much a one-way bet over the last decade on lower bond yields (remember, when yields are low, bond prices are higher), apart from a blip in the early part of 2009.

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