Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 41

Australia joins the PIIGS

Yields on Australian 10 year government bonds are now higher than yields on 10 year government bonds of Italy and Spain, the largest of the European ‘PIIGS’ (Portugal, Italy, Ireland, Greece, Spain), with their crippling debts, lower credit ratings and real possibility of Greek-style default/restructure. How can this be?

The chart shows yields on 10 year government bonds for Australia and the major markets since the start of 2012. The 5% yield spread between Australia and Spain in the middle of 2012 has now been reduced to nil.

Yields required by bond investors reflect a number of things, including:

  • credit risk (expected loss through default or restructure of principal and/or interest)
  • inflation risk (expected loss of real value through inflation during the term of the bond) or
  • expectations of future interest rates (which largely reflect expectations of future inflation and future monetary policy shifts that may be made to counter inflation).

Yields are also being depressed by the flood of cheap central bank money sloshing around the world, but that is a common factor affecting all assets globally, including Australian bonds.

Aside from credit risk, bond yields should rise as economic growth and inflation rates rise, and yields should fall as economic growth and inflation rates fall. But Australian yields have been rising over the past year while the local economy slows, and PIIGS yields have been falling while Europe slowly recovers.

PIIGS yields are declining mainly because the perceived risk of default has declined due to progress on bank bailout and support mechanisms since the 2012 Greek crisis. In the absence of inflationary pressures, yields have little or no inflation premium built into them.

Australia is highly unlikely to default on its bonds any time soon (although it has in the past), but yields on Australian government bonds are still relatively high in order to compensate investors for potential losses:

  • for local Australian bondholders, it is the loss of real value through domestic inflation
  • for foreign holders of Australian bonds, it is compensation for future currency losses through likely declines in the Australian dollar over time due to our higher relative inflation.

Inflation may not be as dramatic or sudden as a headline-grabbing default, but it is just as damaging to real returns for investors.

 

Ashley Owen is Joint Chief Executive Officer of Philo Capital Advisers and a director and adviser to Third Link Growth Fund.

 


 

Leave a Comment:

RELATED ARTICLES

An insider's view of the last financial crisis

Do private investments belong in a diversified portfolio?

Five possible market scenarios guide your asset allocation

banner

Most viewed in recent weeks

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Latest Updates

Superannuation

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

Superannuation

Less than 1% of wealthy families will struggle to pay super tax: study

An ANU study has found that families with at least one super balance over $3 million have average wealth exceeding $19 million - suggesting most are well placed to absorb taxes on unrealised capital gains.   

Superannuation

Are SMSFs getting too much of a free ride?

SMSFs have managed to match, or even outperform, larger super funds despite adopting more conservative investment strategies. This looks at how they've done it - and the potential policy implications.  

Property

A developer's take on Australia's housing issues

Stockland’s development chief discusses supply constraints, government initiatives and the impact of Japanese-owned homebuilders on the industry. He also talks of green shoots in a troubled property market.

Economy

Lessons from 100 years of growing US debt

As the US debt ceiling looms, the usual warnings about a potential crash in bond and equity markets have started to appear. Investors can take confidence from history but should keep an eye on two main indicators.

Investment strategies

Investors might be paying too much for familiarity

US mega-cap tech stocks have dominated recent returns - but is familiarity distorting judgement? Like the Monty Hall problem, investing success often comes from switching when it feels hardest to do so.

Latest from Morningstar

A winning investment strategy sitting right under your nose

How does a strategy built around systematically buying-and-holding a basket of the market's biggest losers perform? It turns out pretty well, so why don't more investors do it?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.