Australia Default Swaps Below U.S., Germany

Australia is being seen as a safer bet than both the U.S. and Germany as concern increases the U.S. may default and Europe struggles to curb deficits.

Investors are paying less to insure Australian government bonds than Treasuries or German bunds for the first time since April 26, 2010. Credit-default swaps to cover the South Pacific nation’s debt for five years traded at 57.69 basis points yesterday, according to CMA prices in New York. U.S. swaps were at 62.47 and German contracts at 62.25.

Australia’s plan to run a 2013 budget surplus contrasts with the inability of President Barack Obama and House Speaker John Boehner to lift a $14.3 trillion U.S. debt cap. Australia expects net borrowings to peak at 7.2 percent of gross domestic product in 2012, when the International Monetary Fund gauges U.S. debt will be 77 percent of GDP. The U.S. faces “massive consequences” if its impasse leads to default, Pacific Investment Management Co.’s Mohamed El-Erian said yesterday.

“The relative fiscal position in Australia is very strong and we have very low net government debt outstanding,” said Janu Chan, an economist in Sydney at St. George Bank Ltd. “In the case of the U.S. there is a heightened risk of a short-term default or a downgrade by the credit ratings agencies and that’s driving up the cost of insuring against default.”

The Australian dollar climbed 23 percent over the past 12 months versus the greenback and traded at $1.1029 as of 1:03 p.m. in Sydney. It yesterday reached $1.1081, the strongest since it was freely floated in 1983. The Aussie has gained 12 percent over the past month against the 17-nation euro.

‘True Haven’

The U.S., Germany and Australia have the highest credit ratings from Moody’s Investors Service and Standard & Poor’s. Both companies put the U.S. under review for a ratings downgrade this month as talks on raising the debt limit stall.

Australian government bonds are a “true safe haven,” National Australia Bank Ltd. Chief Markets Economist Rob Henderson said at a conference in Melbourne on July 26.

Treasurer Wayne Swan said in May Australia’s government will end 23 years of spending growth amid the biggest-ever mining-investment boom.

Former Chinese central bank adviser Yu Yongding yesterday repeated his call for China to reduce its Treasury holdings amid an impasse among U.S. policy makers.

U.S. ‘Not Safe’

“U.S. bonds are not safe, but people think they are safe,” Yu, a researcher at a Beijing institute under the Chinese Academy of Social Sciences, told reporters at a briefing in Mumbai, India. “That is a mirage.”

White House economic adviser Gene Sperling said yesterday debt talks in Congress are at a “stalemate” and both sides need to reach a compromise before Aug. 2, when the U.S. hits its ceiling on borrowing. Neither of the competing proposals from Senate Democrats and House Republicans are likely to pass Congress as things now stand, he said.

Australia’s bonds have returned 5.9 percent this year, including reinvested interest, the best return after New Zealand among 20 developed markets tracked by Bank of America Merrill Lynch indexes.

“Investors diversifying away from U.S. dollar assets continue to favor Australian bonds as a high-grade, higher- yielding alternative,” Jarrod Kerr, director of Australia rates strategy at Credit Suisse Group AG in Singapore, said this week. “Unfortunately for larger funds and central banks, the market is just not big enough to meet their demand.”

European Bailouts

While Germany’s economy is growing faster than the U.S. and the rest of the euro zone, bond traders are concerned the country faces spiraling costs as Chancellor Angela Merkel leads the bailout of cash-strapped partners among the nations that share the euro.

Credit-default swaps on New Zealand’s debt traded at 68.81 basis points yesterday, the narrowest spread to the U.S. since Nov. 8. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

U.S. contracts have climbed 12 basis points since June 30, heading for the biggest monthly advance since August.

The world’s largest economy would experience “headwinds” to growth and employment, already in a crisis, if its credit rating were downgraded, El-Erian, chief executive and co-chief investment officer at Pimco, the world’s biggest manager of bond funds, said in a radio interview on “Bloomberg Surveillance” with Tom Keene yesterday.

Default swaps protect bond investors against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

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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Australian Treasurer Wayne Swan

Ian Waldie/Bloomberg

Australian treasurer Wayne Swan said in May Australia’s government will end 23 years of spending growth amid the biggest-ever mining-investment boom.

Australian treasurer Wayne Swan said in May Australia’s government will end 23 years of spending growth amid the biggest-ever mining-investment boom. Photographer: Ian Waldie/Bloomberg

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Australian Dollar Climbs

Ian Waldie/Bloomberg

Australian banknotes in various denominations are arranged for a photograph in Sydney, Australia.

Australian banknotes in various denominations are arranged for a photograph in Sydney, Australia. Photographer: Ian Waldie/Bloomberg