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.

 

  •   22 November 2013
  •      
  •   

 

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

Want your loved ones to inherit your super? You can’t afford to skip this one step

One in five Australians die before retirement and most have not set up their super properly so their loved ones can benefit from all their hard work and savings. 

Indexation implications – key changes to 2026/27 super thresholds

Stay on top of the latest changes to superannuation rates and thresholds for 2026, including increases to transfer balance cap, concessional contributions cap, and non-concessional contributions cap.

Super is catching up, but ageing is a triple-threat

An ageing Australia is shifting the superannuation system’s focus from accumulation to the lifecycle of retirement. While these pressures have been anticipated for decades, they are now converging at scale and driving widespread industry change.

Has Australia wasted the last 30 years?

The 20 years after Peter Costello left Treasury have been deemed wasted...by Peter Costello. The missed opportunities for Australia began long before.  

The refinery problem: A different kind of energy crisis in 2026

The Strait of Hormuz closure due to US-Iran conflict severely disrupted global energy supply chains. While various emergency measures mitigated the crude impact, the refined product market faces unprecedented stress.

3 ways to defuse intergenerational anger

With the upcoming budget increasingly likely to include bold proposals to alter the tax code I’ve outlined three incremental steps with fewer unintended consequences.

Latest Updates

Investment strategies

War can’t be good, can it?

War brings immense human suffering and geopolitical chaos, but historically, equity markets have shown a certain detachment and resilience amid conflict, leading to increased profitability despite initial panic.

Property

Origins of the mislabeled capital gains tax ‘discount’

Debate over the CGT discount is intensifying amid concerns about intergenerational equity and housing affordability. This analysis shows that the 'discount' does not necessarily favor property investors.

Superannuation

Div 296 may mean your estate pays tax on assets your beneficiaries never receive

The new super tax, applying from 1 July, introduces more than just a higher rate on large balances. It brings into focus a misalignment between where wealth sits and where the tax on that wealth ultimately falls.

Investment strategies

There’s more to software than just code

AI-driven fears of collapsing software moats has triggered indiscriminate sell-offs. This has created mispricing opportunities as markets overreact to uncertainty and rising discount rates.

Economics

Europe: A new growth trajectory powered by reform and investment

Europe is undergoing a major transformation driven by security threats, US pressure, and a shift from austerity to growth. EU member states are taking proactive measures to enhance competitiveness and resilience.

Investment strategies

Orbital AI data centers prepare for launch

The new space race is driven by AI as data centers in space offer continuous solar power and reduced environmental impact. Orbital AI aims to speed data processing and ease Earth's resource strains.

Retirement

Little‑known government scheme can help retirees tap into $3 trillion of housing wealth

The Home Equity Access Scheme in Australia allows older homeowners to tap into their home equity for retirement income, yet remains underused due to lack of awareness and its perceived complexity.

Sponsors

Alliances

© 2026 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.