As Aussie yields jackknife, we can ask: is Australia in a sovereign debt crisis?
The answer is in two parts. The first is discouraging. It comes in the form of an Aussie yield curve that is far too steep relative to growth prospects:
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The question is why?
I put that down to three factors:
- the RBA has lost a lot of credibility in the past year and that is now priced in wider spreads;
- the Albanese Government’s energy cowardice is embedding higher inflation, and
- Australia’s botched vaccine rollout delayed our recovery cycle so we are a quarter or two behind other DMs on the downside as well.
The second part of the answer to whether Australia is in a sovereign debt crisis is this chart:
This is the Australian sovereign credit default swap which is the price to insure Canberra’s debt. As you can see, it is basically tracking the US while other high-risk jurisdictions, such as Italy, are blowing out much faster.
So, no, there is no sovereign debt crisis. But there are mounting policy errors making this end-of-cycle shock much worse for Australia than it ever needed to be.
Indeed, every day that passes without intervention from Albo’s cowards in failed energy markets adds more downside to house prices. And every time the RBA hikes with no hard data to support its wages inflation panic makes that even worse. BBSW is pricing another 75bs tightening over the next three months:
Australia’s fixed mortgage reset and largely floating mortgages make Australian property much more vulnerable to jackknifing interest rates than in the US.
Thus, in my view, the Aussie curve should be at least as advanced into inversion as the US given the coming recession will very likely be worse than other DMs if local macro-management does not catch up fast.