Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 122

What does the current yield curve tell us?

Introduction

In May this year, the Reserve Bank of Australia (RBA) lowered the official cash rate to 2%. This move ushered in the lowest interest rate environment since 1959 when the money market was established in Australia. People often ask if it is worth investing in fixed income assets with a long horizon, such as annuities and long bond investments. There is a sense that ‘rates will have to rise’ and so people assume that it makes sense to wait.

In practice though, this is not always the case. A range of factors determine interest rates, and the yield curve already reflects expectations of the future. In many cases, even if the rate looks low, not waiting will be the best strategy.

The yield curve

The yield curve is a series of market prices for interest rate-linked securities that have been plotted to create a smooth curve. The securities on the curve range from short-dated deposits to longer maturity bonds. Typically, the curve slopes upwards: it rises, with the longer maturities reflecting the ‘term premium’ that a lender or investor demands for having money tied up for longer.

The yield curve is the market’s best view of expected changes to future interest rates. All around the world, highly motivated traders, analysts and investors are making decisions about the likely movements of interest rates for up to 30 years into the future. If those market participants think, for example, that interest rates are going up in 2017, you would already be able to see higher yields in the prices at the relevant part of the yield curve. Let’s have a look at what the current yield curve is saying.

The chart below shows the market forecast for interest rates based on Australian government bonds with maturities out to 2037. The curve initially descends, then is flat for a while, but eventually slopes upwards. What the curve shows is that the market is saying: “We don’t think interest rates are going up before 2017 and they are likely to remain below 4%.”

The role of long dated assets in times of low interest rates

In the accumulation stage, fixed interest assets are used primarily to minimise losses when markets fall. Low returns don’t change the need to manage risk and long-dated assets provide that benefit. Investors in a low rate environment might need to take on more risk, elsewhere in the portfolio, to reach their targets, but the risk-reducing role of bonds remains. Also, low rates will not affect the yield to maturity of a fixed income asset held to term, regardless of what the ‘mark-to-market’ might look like.

In retirement, long dated bonds and annuities are used to generate secure income, not just reduce risk, so the return should matter. Putting aside the option to take more risk, the question is can a retiree generate more secure income by avoiding long dated fixed interest assets?

Is it better to wait?

One of the problems with low rates is that people remember when rates were much higher. What they forget is that interest rates don’t operate in a vacuum. High rates are generally accompanied by other negative factors and externalities, often a breakout of inflation. It would be like remembering that great hot summer from your childhood spent almost entirely at the beach, while forgetting that it was actually a really severe drought. There are great stories about ‘someone’s uncle’ who bought an annuity in the early 1990s when rates were high. In hindsight, that was a great time to buy any long term interest rate-sensitive asset, but many other aspects of the economy at that time were potentially harmful to investors. Government bonds were over 13% and the Reserve Bank was yet to adopt an inflation target of 2-3%. Rates are unlikely to get back to those levels (without an explosion in inflation), but it is tempting to think that waiting until they get to 6% might be a good bet.

The problem with this way of thinking is that you might be waiting a very long time. Japan’s history, for instance, shows us that rate movements are never a one-way bet. Yields continued to fall after the 1989 Nikkei collapse and cash rates have been 1% or lower in Japan for 20 years. The key drivers for low rates have been continuing low inflation (and deflation) and the demographics of an ageing population. The rest of the developed world is facing these conditions now.

Anyone waiting for higher rates can expect higher income down the track. This is exactly what the yield curve tells us. Instead of the 2% rate now, interest rates are expected to go above 4% in the future. But, waiting for interest rates to rise often means you lose out overall; you spend too long holding lower yielding short-term assets like cash and you are trying to ‘time the market’. When rates increase in line with the expectations in the yield curve, the total income payments received are often less than a single longer term investment.

A role for low-yielding assets

The low rate environment is likely to be here for a while. Retirees still need a secure income stream, even if rates are low. Without simply rolling the dice and taking on more risk through investing in more volatile investments, retirees can benefit from buying low-yielding, long-dated assets now, rather than waiting and hoping that rates rise more than the market currently expects.

 

Aaron Minney is Head of Retirement Income Research at Challenger Limited. This article is for general educational purposes and does not consider the specific needs of any investor.

 

  •   14 August 2015
  • 1
  •      
  •   

RELATED ARTICLES

Things may finally be turning for the bond market

Why we believe bonds are now beautiful

On interest rates and credit, do you feel the need for speed?

banner

Most viewed in recent weeks

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

Latest Updates

Property

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

Investment strategies

Is defensive the new offensive?

Relatively boring, unglamorous, defensive stocks like Kroger and Allstate have quietly outperformed gilded tech giants, offering steady growth, visibility, and resilient returns in a market captivated by AI and flashier industries.

Shares

How the RBA scores on its inflation goal

The Reserve Bank continues to face criticism from all sides. A reminder of the RBA's mandate and a review of their track record in maintaining price stability since the early 1990s.

Investment strategies

Levered credit: A late cycle ingredient for drawdown pain

As credit spreads normalised through 2025, yield‑hungry investors have turned to leverage for high returns, uncomfortably echoing pre‑GFC behaviours. Investors need to be careful to understand the true risk‑return trade‑off.

Planning

The more things change… longevity just goes on increasing

Australia needs a major shift in longevity awareness, attitudes and behaviour if, as a community, we are to reap the benefits of increasing longevity. Adopting a national strategy is well overdue.

Property

The improving outlook of Australian commercial real estate

The sector is positioned to benefit from defensive and resilient income streams supported by embedded rental increase opportunities. 

Property

Seize hidden opportunities among 50+ home buyer schemes in Australia

There is a laundry list of government schemes to help Australian's struggling with housing affordability. Savvy buyers should take advantage to break into the property market.

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.