Aussie Real Yields Surge in Battle Against High Cost of Living

As of March 2025, the Australian economy is grappling with a rapidly deteriorating global outlook, and the Reserve Bank of Australia (RBA) is in the midst of a delicate balancing act. The RBA has started cutting interest rates in response to a slowing pace of inflation, but the cost of living remains stubbornly high. This has led to a surge in real yields, which are the nominal yields adjusted for inflation. For income-seeking investors, this presents both challenges and opportunities.



The RBA's decision to cut interest rates is a direct response to the slowing pace of inflation. As stated by RBA governor Michele Bullock, "The impact of high inflation over the past couple of years has permanently increased the price level. That has hurt everyone but particularly those on lower incomes and the more vulnerable." This indicates that while inflation has slowed, prices remain higher than they were before the inflationary period. The RBA's rate cuts aim to stimulate economic activity and support growth, which can influence real yields.

Real yields, which are the nominal yields adjusted for inflation, are affected by both interest rates and inflation expectations. When the RBA cuts interest rates, nominal yields on bonds and other fixed-income securities decrease. However, if inflation expectations remain stable or decrease, real yields may also decrease. This scenario is supported by the RBA's governor Michele Bullock's statement: "The impact of high inflation over the past couple of years has permanently increased the price level. That has hurt everyone but particularly those on lower incomes and the more vulnerable." This suggests that while inflation has slowed, its effects are still felt, and real yields may remain low.

For long-term investment strategies, the impact of these policies is multifaceted. Lower real yields can make fixed-income investments less attractive, as they offer lower returns after adjusting for inflation. This is particularly relevant for investors relying on fixed-income securities for stable returns. As noted, "Bonds and other investments typically considered 'lower risk' may offer less stability and diversification potential." This implies that traditional safe-haven investments like bonds may not provide the same level of security and returns in a low real yield environment.

Moreover, the RBA's policies can influence the attractiveness of other asset classes. For instance, commodities and real estate, which are often seen as inflation hedges, may become more attractive. As stated, "Commodities and inflation have a unique relationship, where commodities are an indicator of inflation to come; as the price of a commodity rises, so does the price of the products that the commodity is used to produce." This suggests that investors may shift towards commodities and real estate to protect against inflation and benefit from potential price increases.



In summary, the RBA's current economic policies and interest rate adjustments influence the trajectory of real yields by affecting both nominal yields and inflation expectations. These policies can make fixed-income investments less attractive and encourage a shift towards inflation-hedged assets like commodities and real estate. Investors need to adapt their long-term strategies to account for these changes, focusing on diversification and considering asset classes that can perform well in a low real yield environment.