Australian Bond Market to Reach A$740 Billion in June 2015, UBS Estimates

The Australian bond market may grow 44 percent to about A$740 billion ($785 billion) by June 2015, led by increases in debt sales from regional governments and corporate issuers, UBS AG said.

State government outstanding borrowings will climb A$86 billion, while corporate bonds will rise A$60 billion and federal securities will increase A$42 billion, Matthew Johnson, a Sydney-based bond strategist for UBS, wrote in a note to clients. The Australian bond market will have increased by about A$500 billion between June 2008 and June 2015, according to the analyst.

Both federal and state bond markets “will be characterized by a tight supply-demand dynamic for some time -- even in the case where unexpected economic weakness results in supply that is higher than we forecast,” Johnson wrote.

Overseas buying of federal and state bonds coupled with increased demand from bank balance sheets will absorb the higher borrowings, he predicted. The Australian Prudential Regulation Authority said on Feb. 28 that only so-called semi-government and sovereign bonds qualify as liquid assets banks need to hold under Basel Committee on Banking Supervision standards coming into force by 2015.

Outstanding debt for the Federal government stood at A$191.3 billion as of June 30, according to data from the Australian Office of Financial Management. The total borrowings of the nation’s six states and the Northern Territory are A$173.7 billion, according to Bloomberg data.

6.4 Percent Return

Australia’s government bond market has gained 6.4 percent this year, including reinvested interest, the best return after New Zealand, among 20 developed markets tracked by Bank of America Merrill Lynch indexes. State bonds have risen 6.5 percent.

As Prime Minister Julia Gillard’s government returns to a budget surplus by 2013 and state borrowings slow, the composition of the UBS composite bond index for the nation will begin to “tilt away from government,” Johnson wrote. The share of federal and state debt will fall to 60 percent of the index by June 2015 from about 64 percent in the 12 months ended June 30, 2011, according to the strategist. The proportion had climbed from about 48 percent in June 2007.

Supranational and state-backed borrowers issuing in Australian dollars will increase debt sales by about A$37 billion, Johnson wrote.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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