Scarcity Drives Non-Bank Bond Prices to Nine-Month High: Australia Credit

Bonds sold in Australia by companies outside the financial industry are trading at the highest price in almost nine months amid a scarcity of local currency debt.

Notes sold by Woolworths Ltd., Telstra Corp. and other companies account for A$3.6 billion ($3.8 billion) of bond sales in the nation this year, or 6 percent of offerings, compared with $293 billion and 52 percent in the U.S., according to data compiled by Bloomberg. Pacific Investment Management Co. and Western Asset Management Co. are buying Australian dollar non- financial bonds, lured by economic growth forecast to outstrip the U.S. and Europe next year and the highest interest rates in the developed world.

“There is a scarcity bid for issuers that are well- regarded,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$14 billion of fixed-income assets. “Australian corporates are viewed as stronger due to the healthier state of the domestic economy relative to the U.S. or Europe.”

The weighted price of bonds in the Bank of America Merrill Lynch Australian Industrial Index reached 100.6 cents on the dollar May 27, the highest since Sept. 3 last year. The price has jumped 1.8 cents in 2011, outpacing increases on similar U.S. and global debt, the indexes show.

As investors snap up the bonds, relative yields on the debt of Australian companies are tumbling.

Woolworths Bonds

Woolworths, the nation’s largest retailer, paid less to borrow than General Electric Co. when it sold A$500 million of five-year notes in March.

The 6.75 percent securities were priced to yield 105 basis points more than the swap rate, compared with a spread of 110 paid by GE’s local finance unit on a sale of three-year bonds in February, Bloomberg data show. The relative yield on Sydney- based Woolworths’ bonds has since fallen to 85, Australia & New Zealand Banking Group Ltd. prices show.

Telstra, Australia’s largest phone company, sold A$150 million of 10-year, 7.75 percent bonds at a 200 basis-point spread in June, Bloomberg data show. When it added to the line this month, it paid 160 basis points.

Local currency bonds sold by Woolworths, Telstra and other companies including oil and gas producer Santos Ltd. have gained 4.7 percent this year, according to Bank of America Merrill Lynch’s Australian Industrial Index. That beats the 3.1 percent return on industrial company debt sold globally and 3.9 percent on similar bonds in the U.S., Merrill Lynch data show.

U.S. industrial bonds climbed 1.3 cents on the dollar this year while the global equivalent gained 0.7 cents, the data show. Yields on the Australian index relative to government debt have fallen 29 basis points to 184 this year.

‘Attractive’ Debt

“Australian corporate bonds are attractive because the mining cycle is generating a lot of free cash flow that’s very supportive for the local growth outlook, and companies tend not to be very leveraged,” said Hayden Briscoe, head of Australia and New Zealand fixed income at AllianceBernstein Holding LP’s local unit.

Reserve Bank of Australia Governor Glenn Stevens increased borrowing costs seven times between October 2009 and November 2010 to 4.75 percent to contain inflation as the nation’s biggest resources boom in a century cut unemployment to 4.9 percent.

The U.S. Federal Reserve has kept its main interest-rate in a range of zero to 0.25 percent since December 2008. The European Central Bank raised its benchmark interest rate to 1.25 percent last month after keeping it at a record low of 1 percent for almost two years.

Growth Forecasts

Economists forecast 4 percent growth for Australia in 2012, compared with estimates of 3.1 percent in the U.S. and 1.7 percent in Europe, Bloomberg surveys show.

Interest rates and demand for commodities helped spur a 26 percent advance in the nation’s currency in the past 12 months against the U.S. dollar, Bloomberg data show. The so-called Aussie reached $1.0691 at 2:32 p.m. in Sydney today.

Consumer prices in Australia may rise an annual 2.98 percent in the next five years, based on the gap between yields on government bonds and inflation-indexed notes. The RBA aims to hold inflation between 2 percent and 3 percent on average.

The yield on the benchmark 10-year government bond fell 2 basis points to 5.21 percent at 2:33 p.m. today, or 214 basis points more than similar-maturity Treasuries.

Western Asset

Western Asset Management, which is part of Baltimore-based Legg Mason Inc. and oversees $454 billion, has bought Telstra’s 7.75 percent bonds due in 2020, and debt sold by property firm Stockland and Australia Pacific Airports Corp., the owner of Melbourne Airport, according to data compiled by Bloomberg.

The scarcity of Australian corporate bonds is partly due to companies funding themselves overseas in currencies such as the U.S. dollar and euro, where lower benchmark rates help cut yields. Bond sales by Australian companies in the U.S. made a record start to the year, with Telstra, Woolworths and National Australia Bank Ltd. among banks and firms offering $42.5 billion of notes, Bloomberg data show.

Woolworths is paying a 3.15 percent coupon on $300 million of April 2016 notes sold in the U.S. last month, compared with 6.75 percent on its Australian-dollar bonds due the same year and issued in March, Bloomberg data show.

Australian banks continue to sell more bonds domestically than non-financial companies, even as the lowest mortgage demand since at least 1977 reduces lenders’ need to raise debt.

Bank Bonds

ANZ Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp. have sold a combined A$11.9 billion of bonds domestically in 2011, more than three times the debt issued by all non-financial companies, Bloomberg data show.

“Australian credit portfolios are always looking to diversify away from financials,” said Briscoe of AllianceBernstein, which manages $477 billion globally including $210 billion of fixed-income assets, according to its website.

The average price of bonds in the Australian Industrial Index is 32 cents on the dollar higher than securities in the Australian Financial Index, Merrill Lynch data show. The gap was as low as 1 cent in March.

Newport Beach, California-based Pimco, manager of the world’s biggest bond fund, prefers Australian corporate notes to government debt and favors resource companies and supermarkets, according to Robert Mead, Sydney-based head of portfolio management.

Demand for local currency corporate debt has pushed relative yields on some new offerings too low, said Mead.

“The levels on some primary transactions have been squeezed too much,” he said. “We have been better buyers in the secondary market at wider levels.”

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

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.

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