Yields at 2009 Lows as Europe to Rein in Economic Growth: Australia Credit

Australian benchmark government bond yields were 11 basis points from the lowest since 2009 on concern contagion from Europe’s debt crisis will undermine the national economy’s recovery.

The 10-year note’s yield rose to 4.32 percent as of 12:38 p.m. in Sydney, after a government report showed second-quarter gross domestic product grew faster than economists estimated. The rate was 4.21 percent yesterday, the lowest closing level since March 20, 2009. Five-year government debt yielded 3.90 percent, 10 basis points less than one-year securities and near yesterday’s biggest discount since September 2008.

In times of increasing “anxiety” within global financial markets, “it is good to be in a position to be able to maintain steady settings,” RBA Governor Glenn Stevens said today in Perth. Australia’s growth outlook may be weaker than previously estimated though price pressures may still demand attention, he said. Swaps traders expect the RBA to make the steepest cuts to key rates among the Group of 10 currencies, according to Credit Suisse Group AG indexes.

“The market disagrees completely with the RBA in terms of the likely outlook for growth and inflation and interest rates,” said Sally Auld, a JPMorgan Chase & Co. interest-rate strategist in Sydney, in an interview yesterday. Diminished prospects for global growth “imply that there’s no way Australia is going to be fine through all of this,” she said.

Government securities from one month to 12 years in maturity have yielded less than the central bank’s target for the past 21 days, the longest stretch at that relative level since November 2008.

RBA On Hold

Stevens today signaled a willingness to keep interest rates on hold while consumers retrench and global financial markets create instability for the “foreseeable future.”

Interbank cash-rate futures show traders pared bets on a cut in the benchmark in October, with the implied yield rising to 4.59 percent from 4.48 percent yesterday.

Investors concerned Europe’s debt crisis will derail the global recovery are betting the RBA will cut borrowing costs by 115 basis points over 12 months, the Credit Suisse gauges show. Sweden’s central bank is expected to lower rates by 44 basis points, the second-biggest forecast cuts.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on Sept. 5 that conditions in the stock and bond markets are reminiscent of the financial crisis of late 2008.

“The ‘new normal’ is characterized by volatility and uncertainty -- not only in respect to market developments, but also in consideration of the future of the financial branch,” Ackermann said at a conference in Frankfurt. “All this reminds one of the fall of 2008.”

Governor Stevens slashed the cash rate from 7.25 percent to 3 percent between September 2008 and April 2009 to counter a credit freeze that followed the collapse of Lehman Brothers Holdings Inc.

Best Returns

Goldman Sachs Group Inc. and Deutsche Bank AG predicted the RBA will lower rates this year after official data on Aug. 11 showed the unemployment rate rose in July for the first time since October 2010.

Australian sovereign debt delivered a 10.2 percent return this year, the best among 21 developed nations tracked by Bloomberg and the European Federation of Financial Analyst Societies.

Ten-year yields slid for an eighth month in August, falling 43 basis points to 4.37 percent on Aug. 31, posting the longest stretch of declines since 1991. The yield rose 11 basis points to 4.32 percent as of 12:48 p.m. in Sydney, which is 230 basis points, or 2.30 percentage points, more than on similar-dated U.S. Treasuries.

Australian Growth

Benchmark bond yields climbed by the most in two weeks today after Australia’s second-quarter gross domestic product advanced 1.2 percent from the previous three months, when it fell a revised 0.9 percent, a Bureau of Statistics report today showed. That compared with the median of 25 estimates in a Bloomberg News survey for a 1 percent gain. GDP shrank in the first quarter after floods inundated mines and farmland in the nation’s northeast, hurting exports.

“It’s the global piece that the market is looking at as opposed to the domestic front,” said Nick Maroutsos, a Sydney- based money manager and co-founder at Kapstream Capital, which oversees A$4.1 billion ($4.3 billion). “The market has certainly priced in a lot of rate cuts, but we think that while the data in Australia has swung back to the middle of the pendulum, it’s still relatively positive.”

Stevens’s stance that he doesn’t need to lower rates is underpinned by a projected A$225 million a day in mining investment and record prices for commodities exported by the only developed economy to avoid 2009’s global recession.

Mining Boom

Australian companies have been looking past reports of weaker U.S. and European growth, spending more on plant and equipment to meet surging demand from emerging markets in Asia that were the main drivers of the world’s economic recovery over the past two years.

Mining investment is projected at A$82.1 billion in the 12 months to June 30, 45 percent higher than in the 2010-2011 fiscal year, a government report showed last week. Firms including Melbourne-based BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, are expanding output to meet demand from China and India.

Investment Pipeline

Australia’s investment pipeline helped boost the local dollar, the world’s fifth-most traded currency, to $1.1081 on July 27, the strongest since it was freely floated in 1983. The so-called Aussie rose 0.9 percent to $1.0575 today.

Bond investors are estimating Australian consumer prices will rise at an annual 2.57 percent pace over the coming five years, down from this year’s high of 3.14 percent on May 6, according to the gap between indexed government debt and bonds that aren’t linked to inflation. That’s still the highest among eight developed markets tracked by Bloomberg data.

“While growth seems to be turning out weaker than expected at the end of last year, underlying inflation seems to be turning out higher,” Stevens said today. “A key question is whether that is just the vagaries of statistical noise and lags, or whether it is telling us that the combinations of growth and inflation available to us in the short term are less attractive than they seemed a few years ago.”

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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