BlackRock Inc. and UBS Global Asset Management say a stable central bank rate will anchor Australian bond prices, rejecting the consensus forecast of economists that yields will jump to the highest in 2 1/2 years.
Australia’s 10-year yield will end the year around 3.8 percent, edging up from 3.71 percent yesterday, according to Stephen Miller, a Sydney-based investor at BlackRock, the world’s biggest money manager. UBS AG’s asset management arm sees it “slightly higher than here,” above 4 percent, according to Anne Anderson, head of Asia-Pacific fixed income. The median forecast of 14 analysts surveyed by Bloomberg was for an increase to 4.5 percent, the highest since October 2011.
“The RBA is firmly on hold and has no plans to adjust rates,” Miller said by phone on May 19. “There are some headwinds to growth and I think inflation and wage growth are well-contained.”
Reserve Bank of Australia policy makers signaled this month that the benchmark rate will remain at a record-low 2.5 percent for the foreseeable future as they decreased near-term inflation forecasts and lowered economic growth expectations for next year. Sovereign bonds are on track for their biggest annual return in three years as the central bank sees growth being limited by spending cuts aimed at trimming the federal deficit 40 percent to A$29.8 billion ($27.6 billion) next fiscal year.
The benchmark 10-year yield has fallen 28 basis points in the past month, the most after Israel among 25 advanced nations tracked by Bloomberg. That compares with an 18 basis-point drop in similar-maturity U.S. Treasuries to 2.54 percent. The gap between Australia and the U.S. narrowed to 1.14 percentage points on May 19, the least in eight months. The Australian dollar bought 92.70 U.S. cents as of 5 p.m. in Sydney yesterday.
Even after its recent decline, Australia’s 10-year yield remains the highest after New Zealand’s among 10 major developed economies.
TD Securities sees Australia’s 10-year yield rising to 4.40 percent by the end of 2014, down from its previous forecast of 4.55 percent in a Bloomberg survey conducted May 8 to May 13.
“We’ve got the selloff scaled back considerably,” Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities, said in a phone interview yesterday. “U.S. 10-year yields at 2.5 percent are well below expectations. We need the U.S. to turn before we can expect the Australian yields to turn.”
Bank of America Merrill Lynch index data show Australian sovereign debt is set for a 9.9 percent return this year, which would be the biggest since 2011 and compares with an 8.1 percent annualized advance in Treasuries. Australian notes due in 10 years or longer led gains, returning an annualized 21 percent.
“Aussie bonds will probably outperform U.S. Treasuries,” said BlackRock’s Miller, who sees yields on U.S. government debt due in a decade climbing toward 3 percent by the end of 2014. The money manager oversees $4.3 trillion globally.
RBA Assistant Governor Guy Debelle said yesterday Japanese investors may be a source of potential additional demand for Australian government securities. They bought a net 240 billion yen ($2.4 billion) of Australia’s long-term sovereign bonds in the first three months of this year after net sales of 258.8 billion yen last year, Japan’s finance ministry data show.
The RBA cut its core inflation forecast for the 12 months ended June 30 to 2.75 percent from 3 percent, and lowered its growth range for 2015 by a quarter percentage point in its quarterly monetary policy statement published May 9.
Policy makers predicted growth in domestic costs will “remain contained” and said overall expansion in coming quarters will be limited by planned fiscal consolidation, according to minutes of the central bank’s May 6 meeting released yesterday.
The deficit in Australia, which holds AAA ratings from all three main credit assessors, will narrow in coming years and shrink to A$2.8 billion by 2018, according to the budget released on May 13.
The nation’s top credit score is not immediately at risk as the government showed a commitment to “prudent finances” in last week’s budget, Standard & Poor’s said. Australia’s stable AAA grade means there’s a less than one-in-three chance of a change to the rating over the next couple of years, Craig Michaels, a Melbourne-based analyst with S&P said in a phone interview yesterday.
“The influence of a stable cash rate in Australia will generally see demand for Australian government debt increase in both a relative and absolute sense,” UBS Global’s Anderson wrote in an e-mailed response to questions on May 15. “In a world of low Group of 10 yields, Australian bonds look attractive given the sound fundamentals.”
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