Hence the recent interest rate rises of .25% as at 1 December 2009, with the current cash rate now 3.75%. On news of the Reserve Bank of Australia lifted rates for the second time in 2mths Bonds rallied as retail banks will start to increase their cash rates (Westpac bank adding .45% to their mortgage rates). This gave a lift to bond markets especially the 10 year bond at 94.78%. The reasons? Debt default fears and Australia falls into that category, as discussed in Australia - Export/import prices still falling . Australia has a widening trade account deficit and it's terms of trade is falling. As it will be an issue for it's sovereign fund as government will struggle to pay for debt and maintain tax revenues (with baby boomers retiring and a growing popoulation) - so overall it's fiscal deficit will blow out in the next 5 years.
Also unhelpful are the FX market distortions, namely becuase of a weak US dollar. Export countries may have no choice but to devalue their currencies to build up earnings from falling export credits. But of course this puts pressure on bond values as the market sees inflation creeping thus causing yields to rise. But regardless an oversupplied and value decreasing bond market constitutes to a global debt crisis brewing into 2010 as Dubai was the warning shot.
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