On Monday the prime minister gave a speech to the WA Chamber of Commerce that outlined some economic policies he planned to pursue. Chief among them was cutting red tape (apparently the past six years have not afforded them the opportunity to do this). It was a very tepid response to an economic situation that demands much more serious attention.

Last week for the first time ever Australian government two-year and three-year bonds fell below 1%, and then on Friday so too did the rate (or “yield”) for five-year bonds:

I know bond yields are not the sexiest of subjects (unless you go in for that kind of thing and, knowing my readers, there are a few of you out there who do!) but they give us a good insight into where the economy is likely heading.

They also put paid to any hogwash that the government could rightly have claimed during the election campaign that the fundamentals of the economy were strong.

Government bonds are essentially how the government borrows money. Right now the government has borrowed $541bn worth of money via bond issues and they are for various time periods – think of it like a term deposit.

Now just like you taking out a term deposit at a bank, the government has to offer an interest rate (known as a yield) to entice investors to give them their money.

Because the Australian government will not go bust, the interest rates for bonds are lower than bank term deposits, and generally the government needs to offer higher rates the longer the bond is.

Again think of it like a term deposit – if you were to give the government $100,000 for a year you might be happy with getting that $100,000 plus 2% in 12 months time because you are pretty sure what the inflation rate will be and also your likely return from other investments like shares.

And this is where bonds start to be very good for telling us about the future.

The Australian government two-year bond rate for example is a very good indicator of what is going to happen to the cash rate:

Because the yield for the two-year bonds is now below 1%, it is highly suggestive that the cash rate is headed that way as well.

But bond yields also tell us a bit about whether things are expected to get better or worse.

Imagine if instead of one year you were to give the government that money for five years. You would now want more than 2% each year because that is five years during which you don’t have that $100,000 to invest elsewhere – say the stock market. You would also expect the economy will grow and inflation growth also likely to increase. You therefore want more than 2% to make up for the penalty of not being able to use that $100,000 elsewhere for five years.

So as a rule the yields increase as the length of the bond increases.

But what if investors think over the next five years the economy is going to turn bad – that profits will dry up, that inflation growth will fall? Instead of investing in shares they will seek the safety of government bonds – and this increased demand for bonds means the government can lower the interest rate it offers, because investors are desperate for security.

When this happens, the yield for five-year and 10-year bonds gets closer to that of one-year and two-year bonds.

But if investors think the economy is going to tank, they will become so desperate for long-term security that the yield for five- and 10-year bonds will actually become lower than it is for one-year bonds.

This is what is called a “negative yield curve” and it has long been a good indicator of a recession.

And it is what has started to happen in the past six months.

Normally the five-year bond yield is on average about 0.3 percentage points higher than for the two-year bond; now it is around 0.05% pts. Earlier this year – in fact around the time the budget was being handed down – it was actually lower:

It was very clear at the time of the budget that things were turning bad.

And while some of the falling rates is due to the US (Australia competes with other countries for investors), the reality is our bond yields have fallen by more than those in the US have – suggesting our outlook is worsening by more than that of America:

The outlook in the US is not good, and it has changed quickly.

Eight months ago, a one month US treasury bond had a yield of 2.18%, and a three-year bond had a yield of 2.99% – pretty much what you would expect when things seem to be going well. Now however that one month bond has a yield of 2.16% but the three year bond yield is just 1.74%.

And we should note the three-year bond yield was already lower than the one-month bond at the time the budget was handed down:

That is a recession outlook. The last time the three-year US bond yield was that much lower than the one-month yield was in 2007 – just before the GFC was about to hit.

So the government cannot claim this worsening outlook took them by surprise. And now, three months after the budget was handed down, they need to acknowledge they got the settings wrong and they need to start responding to the faltering economy.

And some lame guff about cutting red tape is not going to be anywhere near enough.

• Greg Jericho is a columnist for Guardian Australia