UBS Asset Buys Foreign Bank Bonds in Australia on Yield Gap

Bonds sold in Australia by offshore banks are a buy as yields beat those on notes from domestic lenders, according to UBS Global Asset Management Australia Ltd.

“Investors will be looking at some of these foreign banks as a source of yield and diversification and they feel they’re getting compensated for the risk,” Anne Anderson, who helps manage A$20 billion ($18.3 billion) as head of Asia-Pacific fixed income, said in an interview in Sydney. “Credit spreads are quite attractive.”

UBS is buying notes sold by lenders that can call on government support if needed, according to Anderson, who declined to give specific examples. Bank of America Corp., BNP Paribas SA and Royal Bank of Scotland Group Plc, which got bailouts as banks worldwide posted almost $1.3 trillion of losses amid the global credit freeze, all sold bonds in Australia last month.

That helped debt sales by European and U.S. lenders account for the biggest share of the Australian bond market in more than four years in August, according to data compiled by Bloomberg. European banks face “vast” funding needs, Standard & Poor’s said in July, while UBS analysts have estimated that regulatory changes may force lenders worldwide to raise as much as $375 billion in fresh capital.

Higher Yields

RBS, the U.K.’s biggest government-owned bank, paid 245 basis points more than the swap rate to sell three-year bonds last month, the highest yield premium paid among the foreign bank borrowers, according to Bloomberg data.

Commonwealth Bank of Australia, the nation’s biggest lender, priced three-year notes with an 85 basis-point spread this week. The U.K. lender’s Australian unit is rated A+ by S&P, four rungs below the top AAA rating, while CBA is rated two grades higher at AA. A basis point is 0.01 percentage point.

“Systemically important” banks are being recapitalized, Anderson said. “They’re deleveraging, and they’re going back to more traditional banking,” she said. “Those institutions will have a lot lower risk, so they’re the ones that, as a fixed- income investor, are the most fundamentally attractive.”

The Australian asset-management unit of Zurich-based UBS AG also favors the nation’s corporate bonds and debt of its state governments, Anderson said. UBS uses credit-default swaps on industrial companies where it can’t buy bonds amid lack of supply, she said.

“The fundamentals for corporates in Australia are on a very sound footing,” she said. “They’ve deleveraged, have access to funding, and their profitability’s been good because the economy is strong.”

Economy Hums

Australia’s economy expanded at the fastest rate since 2007 last quarter as growth broadened from the mining industry -- which is undergoing a record investment boom to feed Chinese iron and coal demand -- to households that account for more than half of gross domestic product.

Business profits advanced in the three months through June by more than three times the amount estimated by economists.

UBS holds fewer Australian government bonds than the index it tracks, Anderson said, who expects a “retracement” in yields after they fell to a level she deems too low. The yield on the benchmark 10-year note dropped last month to the lowest since April 2009, before gaining 12 basis points in September.

The Reserve Bank of Australia may increase its official cash rate by a further 25 basis points before year-end, Anderson said, taking the benchmark rate to 4.75 percent.

To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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