Pimco Says Australian Poll Means Higher Risk Premiums

Australia’s national election deadlock means investors will demand higher returns to hold the nation’s riskier assets, said Pacific Investment Management Co.

The Aug. 21 poll failed to deliver a parliamentary majority to either of the main parties for the first time in 70 years, meaning Prime Minister Julia Gillard or opposition leader Tony Abbott need the backing of independent lawmakers to form a government. Australia’s currency fell 0.3 percent to 89.13 U.S. cents as of 2:43 p.m. in Sydney.

“These sorts of outcomes provide a higher degree of uncertainty,” said Robert Mead, head of portfolio management at Pimco’s Australian unit, in an interview with Bloomberg Television today. “Risk premiums should remain elevated.”

It may take as long as two weeks for the Australian Electoral Commission to complete counting about 2 million special ballots, including as many as 1 million postal votes. The so-called hung parliament leaves proposed laws in limbo, including Gillard’s planned 30 percent tax on iron ore and coal profits and her A$43 billion ($38 billion) high-speed Internet network.

Gillard’s ruling Labor Party has won 72 seats in the House of Representatives, the same as Abbott’s Liberal-National coalition, the Australian Electoral Commission said on its website at 2 p.m. Sydney time. There are two independents, one Green member and three seats undecided. The party with the majority of the 150 seats forms government, and some 75 percent of the total vote had been counted.

‘Muted’ Reaction

Reaction has been ”muted” today to the hung parliament, Mead said. “Everyone’s waiting to see what the final outcome will be.”

The winner of the election should focus on fiscal discipline, which would be beneficial to holders of Australian government bonds as it would reduce the supply of new debt, according to Mead.

“The electorate was pretty clear that rampant spending by either party was not going to be rewarded going forward,” he said.

Australian government bonds lost 0.039 percent in July, paring returns this year to 4.936 percent, according to a Bank of America Merrill Lynch index. They’ve handed investors a return of 1.317 percent this month, the index shows.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE