While I fully realise that I might be talking to myself, I like...

While I fully realise that I might be talking to myself, I like coming back to this thread every now and then, to keep track of how Australian long-term real yields have been performing over medium/long periods of time.

As of now, and to compare apples with apples, the above-mentioned 2040 1.25% Aussie linker is trading at a yield of 0.44%, which is (yet again) an all-time low. 

Interestingly, the nearest shorter duration (2035 2.00% linker) is already trading at a negative yield of -0.05%. In other words, the Australian real yield curve is already trading in negative territory out to the 16-year point. 

Meanwhile, as a further point of reference, a new 2050 1.00% linker has been issued, which is the new benchmark for the super-long end; that one is still trading at a (surprisingly high, in relative terms) 0.86% yield.

How is this relevant to TCL (and, more generally, to the infrastructure equity complex)? Self-evidently, the stocks of companies with stable, long-duration, CPI-indexed cashflows have a lot in common with inflation-linked bonds; therefore, in inflation-adjusted PV terms, they are worth more (all else being equal) when long-term real yields head south.

And how south can they get? As a term of comparison, both Japan and the Eurozone have experienced a fully negative (i.e. out to the very long end) real yield curve at various points in the recent past. The US still have meaningful long-term real yields (30-year point currently at 1.07%), but I feel it’s just a matter of time before reality catches up with that market too, and it is realised that late-cycle fiscal stimulus in a debt-laden economy is only going to make the problem worse if real yields remain positive.

As I have been saying for more than two years now, I see this global trend lower in real yields as still being in full force, with Australia being no exception (quite the opposite in fact, given the ongoing housing contraction and its ramifications across the economy); therefore, while I don’t particularly like making directional predictions for their own sake, I wouldn’t be surprised to see the whole AUD real yield curve go negative within the next year or two.

And that, everything else remaining the same, is going to represent a powerful tailwind for the likes of TCL.