Pimco Lured by Best Industrial Bond Returns Since 2008: Australia Credit

Bonds sold by Australian companies outside the financial industry are returning the most since 2008 as buyers seek a haven from sovereign debt crises in Europe and the U.S.

The nation’s 200 biggest listed companies have doubled cash piles in the past two years, led by BHP Billiton Ltd. (BHP), Telstra Corp. and Wesfarmers Ltd., while Australia’s economy is forecast to grow faster than the U.S. and euro region, according to data compiled by Bloomberg. That’s attracting Pacific Investment Management Co., manager of the world’s biggest bond fund, as the global economic recovery loses momentum and ratings firms threaten to downgrade the U.S., Japan and Spain.

“Industrial corporates are the new flight-to-quality asset,” said Robert Mead, Sydney-based head of investment management at Pimco. “Many companies in Australia and globally haven’t been willing to invest nor hire as they are not seeing compelling growth opportunities; as a result, their balance sheets have de-levered and their cash balances have grown.”

Bonds sold by Telstra, Australia’s largest phone company, Woolworths Ltd., its biggest retailer and other non-financial corporates returned 1.8 percent in July including reinvested interest, the most since November 2008, Bank of America Merrill Lynch’s Australian Industrial Index shows. Industrial debt has returned 7.9 percent in Australia year-to-date, versus gains of 8.3 percent in the U.S. and 6.6 percent globally, Merrill Lynch data show. Yield premiums on the Australian debt have narrowed in 2011, while spreads widened on comparable U.S. and global securities.

Woolworths, Telstra

The spread to the swap rate on Sydney-based Woolworths’ 6.75 percent securities due March 2016 has narrowed 17 basis points to 88 basis points since the bonds were sold in March, Australia & New Zealand Banking Group Ltd. prices show.

The yield on Telstra’s A$500 million ($532 million) of 7.25 percent securities due November 2012 fell to 4.98 percent today, the lowest since March 2010, according to ANZ Bank prices.

Australian company bonds are drawing investors even as Credit Suisse Group AG warns that corporate earnings may miss forecasts amid signs of faltering domestic growth and a global slowdown.

Australia’s economy will expand at a below-trend pace in the next year due to restrictive monetary conditions, Credit Suisse equity analysts wrote in a July 26 report.

Consensus earnings forecasts for 2011 and 2012 are “optimistic and set for further significant downgrades,” they said. “We maintain a preference for defensives and industrials given the weak growth outlook.”

Retail Sales

The Reserve Bank of Australia cut its forecast for 2011 economic growth today and raised the outlook for inflation. Growth this year will average 2 percent, accelerating to 4.5 percent in 2012, the central bank said in its quarterly monetary policy statement.

Consumer prices will rise 3.5 percent in the year through to the final quarter of 2011, from a previous prediction of 3.25 percent, it said.

The RBA held the overnight cash rate at 4.75 percent on Aug. 2 to gauge slowdowns in the U.S. and China, Europe’s debt crisis and domestic household restraint.

Retail sales unexpectedly declined in June for a second straight month as spending at department stores dropped by the most since April 2010. Lending to companies decreased 0.7 percent in June for the third straight month, the biggest decline since September, the central bank said July 29.

Yields Plunge

Yields on Australian government bonds of all maturities fell below the overnight cash rate on Aug. 3 for the first time since 2009. The benchmark 10-year bond yield fell 20 basis points to 4.53 percent today at 12:50 p.m. in Sydney, the lowest since April 2009, or 214 basis points more than similar-maturity Treasuries.

The Australian dollar traded at $1.0489 as of 12:52 p.m. in Sydney, and has advanced 15 percent against the greenback in the past 12 months.

The U.S. economy expanded at a 1.3 percent annual rate in the second quarter, following a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed July 29.

Italian and Spanish 10-year yields rose to euro-era records versus German bunds this week, on concern slowing growth will hamper efforts to tame the nations’ debt loads. Economists expect the euro region to grow 2 percent in 2011 and 1.7 percent next year, Bloomberg surveys show.

Markets Tumble

The Standard & Poor’s 500 Index had its biggest drop since 2009 yesterday and markets tumbled in Asia today amid speculation the Federal Reserve will resort to more stimulus measures. The European Central Bank made more cash available to banks to keep the region’s debt crisis from spreading.

The International Monetary Fund forecasts Australia’s gross government borrowings will reach 22 percent of the economy in 2015, giving it the smallest debt burden among developed nations after Estonia’s 5.2 percent. Obligation in the U.S., where President Barack Obama signed a bill to raise the national debt- limit on Aug. 2, will swell to 109 percent of gross domestic product, the IMF data show.

“The Australian sovereign balance sheet clearly remains one of the cleanest in the world, but some high quality corporates remain a pretty close second,” said Mead of Newport Beach, California-based Pimco.

Sovereign Risk

Credit-default swaps on the Australian sovereign cost 61.6 basis points, compared with 54.9 basis points for U.S. debt, 89.8 for Japan and 95.5 for China, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Contracts insuring the debt of Melbourne-based BHP, the world’s biggest mining company, last traded at 79.4 basis points, CMA prices show.

The Markit iTraxx Australia index of credit-default swaps on 25 of the nation’s biggest companies has averaged 111 basis points this year, according to CMA prices. The gauge jumped 16 basis points to 139 as of 10:28 a.m. in Sydney, Westpac Banking Corp. prices show, on course for its highest close since July 1 last year and its biggest one-day gain since May 19, 2010.

The fundamental value of the index is about 90 basis points, considering the economic outlooks for Asia, Australia and the member companies’ creditworthiness, Deutsche Bank AG analysts Gus Medeiros and Colin Tan wrote in a second-half outlook last month.

‘Constructive View’

“We maintain a constructive view on the Australian iTraxx driven by Australia’s overall benign economic outlook, monetary and fiscal policy flexibility and the underlying strength of the index constituents,” they said.

Industrial debt in Australia is beating the nation’s government bonds, which gained 7.3 percent in 2011 and are the best-performing sovereign debt after New Zealand among 20- developed markets tracked by Merrill Lynch.

Spreads on the Australian Industrial Index narrowed 8 basis points to 205 basis points this year, compared with a one basis- point widening on comparable debt in the U.S. to 145. Bonds in the global industrial index widened 4 basis point to 141.

About $548 billion of bonds issued by Australian companies will mature by the end of 2015, according to Standard & Poor’s. Ninety-nine percent is investment-grade and 80 percent is owed by financial companies, led by the nation’s four biggest banks.

Companies outside the finance industry accounted for 6 percent of a record A$64.3 billion of bonds sold in Australia in the first half, compared with about 50 percent of $529.9 billion of investment-grade U.S. offerings, Bloomberg data show.

Non-financial corporate debt offers “a diversification away from the banks, which suffer from regulatory issues and weakness in the growth of credit,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$14 billion of fixed-income assets. “The earning seasons could be grim but overall the industrials are not highly leveraged and have strong credit fundamentals.”

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.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.