Since the great bond yield backup of early 2022, local yields have basically gone sideways in a trading range:
However, the more important feature of the bond market for the macro analyst is the shape of the curve. If it is steep then it is predicting accelerating growth and inflation. If it is flat, it is predicting decelerating growth and disinflation. If it is downwards sloping, that is inverted, it is predicting recession and deflation.
The classic duration of yields considered to have this informational content is 2 years out to ten years. On that basis, the very inverted US yield curve has been predicting a recession for a year. Australia has lagged behind this but has begun to catch down again in the past few days since the RBA’s hawkish shift:
However, shorter duration curves are also useful forecasters. The Australian 1 to 5 year yield curve is a good one for predicting per capita recessions. It inverted in 2000, 2008, 2012 and 2019:
In 2000 and 2008 we did have per capita recessions. In 2012 we did not but only via statistical quirk. The economy grew 0.1 for an entire year with 3 straight quarters at zero. 2020 speaks for itself.
Now the 1 to 5 curve has inverted again. Frankly, it has been bizarrely slow to do so. Everybody from the RBA to the budget has per capita recession embedded in their outlook as out-of-control immigration threatens to add 3% to the population while the economy stalls.
That we’re in for falling living standards over the next 12-24 months is about as certain as anything ever is in macro.
Whether this becomes an outright headline recession I do not know. I suspect it will get close as the record house price bust rips the heart from households over the next year.
Certainly, I expect the possibility of a headline recession to become real enough for the 2 to 10 curve to flatten a lot more from here.
