Australian Bonds Gain, Currency Drops on Europe Crisis

Australia’s bonds advanced and its currency halted a three-day gain as surging borrowing costs for Spain reignited speculation that European leaders are struggling to contain their debt crisis.

The so-called Aussie fell against most of its 16 major peers before a Spanish bill sale today as Group of 20 nations prepare to urge euro-area governments to take all steps necessary to protect the currency union. The local dollar held losses after the Reserve Bank of Australia released minutes of this month’s meeting, when it cut interest rates a second- straight time. New Zealand’s currency failed to extend a three- day advance as Asian stocks declined.

“Spain’s got some fairly material structural issues that can’t be solved overnight, and markets are reluctant to lend at the moment,” said Michael Turner, a Sydney-based strategist at RBC Capital Markets. “I could see the Aussie trade a little bit lower.”

Australian bonds rose, pushing the 10-year yield down by 10 basis points, or 0.1 percentage point, to 2.98 percent as of 3:55 p.m. in Sydney. The Australian dollar was at $1.0128 from $1.0124 yesterday after advancing 1.9 percent over the past three days. It fell 0.1 percent to 80 yen.

New Zealand’s currency bought 79.23 U.S. cents after gaining 0.5 percent to 79.19 yesterday. It lost 0.1 percent to 62.60 yen. The nation’s two-year swap rate, a fixed payment made to receive floating rates, dropped 1 1/2 basis points to 2.655 percent.

The MSCI Asia Pacific Index (MXAP) of shares declined 0.3 percent.

Yields Surge

Spanish 10-year yields rose 28 basis points to 7.16 percent yesterday. Greece, Ireland and Portugal sought bailouts when their benchmark borrowing costs topped 7 percent. Spain is scheduled to sell 12- and 18-month bills today and will offer bonds on June 21.

G-20 leaders are set to issue a statement at the end of their summit in Mexico encouraging European governments to “safeguard the integrity and stability” of the euro area, according to the draft provided to Bloomberg News. The excerpt was provided by an official from a G-20 government who declined to be identified because the statement is not yet public.

The International Monetary Fund has commitments for $456 billion to be used as a “second line of defense” to resolve and prevent financial crises, according to Managing Director Christine Lagarde, which she said almost doubles the fund’s lending capacity. Lagarde made the announcement in an e-mailed statement during the G-20 summit.

The Aussie has lost 1.7 percent in the past three months, the worst performance after the euro among the 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The New Zealand dollar, known as the kiwi, declined 1.3 percent.

‘Finely Balanced’

The RBA reduced benchmark borrowing costs by 25 basis points to 3.5 percent this month after a “finely balanced” discussion that the domestic economy was holding up as global prospects worsened, minutes of its June 5 meeting showed.

“What the minutes say is that easing is probably going to be more on global issues rather than domestic issues,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp. (WBC) There’s still a risk “that we see a move back below parity at some stage for the second half of this year, particularly into the third quarter,” he said in reference to the Aussie’s performance versus the U.S. dollar.

The Australian dollar touched its strongest level in three months against the euro yesterday on speculation investors sold the shared currency against the Aussie.

“We believe it was driven by a large, real money euro- Aussie sale,” Emma Lawson, a Sydney-based currency strategist at National Australia Bank Ltd. (NAB)

The Aussie was at A$1.2446 per euro after reaching A$1.2396 yesterday, the strongest level since March 16.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

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

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