A decline in sales of Australian government bonds in the coming fiscal year is set to boost the appeal of the securities, which are on track for their best quarterly performance in two years.
Sales after accounting for maturities will decline 36 percent to A$40 billion ($38 billion) in the year beginning next month, according to estimates from the Australian Office of Financial Management that include nominal and inflation-linked debt. Australian sovereign notes have returned 2.8 percent this quarter to June 20, poised for the best performance since the three months through June 2012, Bank of America Merrill Lynch indexes show. The premium investors demand to hold the nation’s debt over AAA peers fell last week to an almost one-month low.
Prime Minister Tony Abbott’s efforts to curb borrowing are burnishing demand for assets in Australia, one of only nine stable top-rated nations. Benchmark government bond yields approached the lowest level since June last year after the Reserve Bank of Australia reiterated borrowing costs will probably remain at a record low for some time, damping bets for an imminent increase in interest rates.
“Australia’s still very good on a risk-reward perspective as the highest-yielding AAA,” Damien McColough, the head of Australian rates strategy in Sydney at Westpac Banking Corp., said by phone yesterday. “There is this yield enhancement sort of bid out there that will last for some time, which should be very supportive of Aussie government bonds.”
The yield on Australian debt due in a decade was at 3.69 percent yesterday after falling to 3.64 percent on June 19. That’s the lowest since it dropped to 3.61 percent on May 29, a level unseen since June 2013.
RBA policy makers stated they will probably keep the benchmark rate at 2.5 percent “for some time yet,” according to minutes of their most recent meeting published on June 17. It’s hard to gauge how much low rates will offset a drop in mining investment and tighter fiscal policy, they said.
On the same day the minutes were released, Australia’s 10-year yield fell to 1.83 percentage points more than the average benchmark yield of seven sovereign markets rated stable AAA by all three main credit assessors, the least since May 21.
Foreign investors held 67 percent of Australia’s outstanding debt in the first quarter, compared with 67.5 percent in the previous three month period, according to data published June 3.
“Demand for bonds remains very robust from offshore,” Martin Whetton, a Sydney-based interest-rate strategist at Nomura Holdings Inc., said in a phone interview yesterday. “Given they’ve got lower issuance and there’s demand for paper, we do see the likelihood that bonds richen on an asset swap basis over the course of the year.”
Average government bond yields dropped to 27 basis points less than asset swap rates on June 19, equaling the widest such gap since March, according to Bank of America Merrill Lynch data.
The funding arm has this fiscal year placed A$80 billion of nominal bonds due in a year or longer through a combination of auctions and bank-led sales. Investors bid, on average, for 3.82 times the amount of securities on offer at auctions of these bonds in 2013-14, AOFM data show. A May 30 sale of A$700 million of 3.25 percent notes due in October 2018 drew a bid-to-cover ratio of 5.93, indicating the strongest demand in 1 1/2 years.
“As part of the general lack of supply, AOFM tenders remain very strongly bid,” Sydney-based Commonwealth Bank of Australia analysts including Adam Donaldson, head of fixed income strategy, wrote in an e-mailed note to clients yesterday. Offerings at auctions due to restart next month may be smaller than the A$700 million amount seen for most sales since mid-March, according to CBA.
Helping demand for Australian bonds is a rally in the currency, which has risen 3.9 percent in the past three months to 94.37 U.S. cents as of 5 p.m. yesterday in Sydney. That’s the steepest gain after the Canadian dollar among Group-of-10 currency peers.
Australian debt due in more than a year returned 4.8 percent this quarter after accounting for the Aussie’s gains, the best performance among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies along with Hungary.
The yield on 10-year Australian government bonds will probably rise to 4.35 percent by Dec. 31, according to the weighted average forecast of analysts surveyed by Bloomberg.
TD Securities Inc. sees benchmark yields at 4.40 percent by end of 2014.
The forecast “assumes that the bulk of the sell-off is confined to the very late months of this year, so we can expect more of the same low yields over the coming months,” Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities, wrote in an e-mailed note to clients on June 19.
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