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Bonds Heading for Longest Rally Since 2007: Australia Credit

The Reserve Bank of Australia is forecasting the economy will expand 4.25 percent this year, the fastest pace since 1999. Photographer: Sergio Dionisio/Bloomberg
The Reserve Bank of Australia is forecasting the economy will expand 4.25 percent this year, the fastest pace since 1999. Photographer: Sergio Dionisio/Bloomberg

Australian corporate bonds are returning more than four times as much as global company debt this quarter as accelerating economic growth drives the longest rally among developed nations.

Bondholders have earned 2.8 percent since Dec. 31 including reinvested interest, beating the 0.6 percent gain for corporate debt worldwide and 1 percent on U.S. notes, according to Bank of America Merrill Lynch indexes. Eight straight quarters of gains is the best winning streak since 2007 and longer than the advances in the Merrill Lynch indexes of debt sold globally or in the U.S., Canada, Japan, Europe and the U.K., which all posted losses in the final three months of 2010.

The Reserve Bank of Australia is forecasting the economy will expand 4.25 percent this year, the fastest pace since 1999, as Chinese and Indian demand for iron ore and coal spurs the nation’s biggest resources boom in a century. Local bond sales by companies and banks have increased 17 percent this quarter from the same period in 2010, while relative yields on Australian dollar-denominated corporate notes have fallen faster this year than on global debt.

“The outlook is strong with bond demand still outstripping supply and a healthy corporate sector,” said John Sorrell, the Sydney-based head of credit at Tyndall Investment Management Australia Ltd. who helps manage about A$14 billion ($14.4 billion) of fixed-income assets. “Australia has a healthy feel about it due to its links into the China story and Asia.”

Record Profits

The 200 members of Australia’s benchmark stock index have a combined A$116 billion in cash, a 55 percent increase from two years earlier, according to data compiled by Bloomberg based on their latest annual results.

Melbourne-based BHP Billiton Ltd., the world’s biggest mining company, reported record first-half profit of $10.5 billion last month, driven by an almost threefold gain in iron ore prices. Australia’s four biggest banks reported aggregate profits of A$11.2 billion in their latest half-yearly results, about A$3.7 billion higher than a year earlier.

SP AusNet, which manages a A$6.3 billion electricity and gas network, and the owner of Melbourne airport were among companies whose bonds outperformed the 0.8 percent return on Merrill Lynch’s Australian Corporate and Collateralized Index this month.

The extra yield investors demand to own Melbourne-based SP AusNet’s A$300 million of 7.5 percent bonds due in September 2017 instead of similar-maturity government debt has fallen 17 basis points this quarter to 198, Australia & New Zealand Banking Group Ltd. prices show.

Melbourne Airport, Woolworths

Spreads on Melbourne Airport’s A$100 million of 6 percent, December 2015 notes have narrowed 20 basis points to 260.

The relative yield on Woolworths Ltd.’s A$500 million of five-year notes, priced to yield 105 basis points more than the swap rate on March 7, has fallen 13 basis points to 92, ANZ prices show.

Interest rates on Australian dollar-denominated investment-grade corporate bonds average 6.55 percent, seven times more than Japanese company debt and 248 basis points more than U.S. equivalents, Merrill Lynch index data show.

“Yields are particularly attractive” for offshore buyers, said Victor Rodriguez, head of the Australian fixed income unit at Aberdeen Asset Management Plc, which manages $287 billion worldwide. They’re “investing in a bond market where our government is very well positioned in a fiscal sense and our corporates are pretty sound,” he said.

Sovereign Burden

Australia’s sovereign burden of A$184 billion is 22 percent of gross domestic product compared with 59 percent in the U.S., and is the smallest in the developed world after Hong Kong, Bloomberg data show.

Ten-year government bond yields fell 5 basis points this quarter to 5.495 percent. Yields on similar-dated Treasuries increased to 3.457 percent from 3.294 percent in the same period.

The RBA raised its benchmark interest rate seven times between October 2009 and November last year to 4.75 percent, the highest in the developed world.

The increases helped bolster Australia’s dollar, the world’s fifth-most traded currency, which touched a record $1.0294 on March 25. The currency climbed 6 percent in the past six months against the greenback, the second-best performance among major currencies tracked by Bloomberg, to $1.0262 at 4:33 p.m. in Sydney today.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors expect consumer prices will rise an annual 2.94 percent for the next five years, the fastest among eight developed nations tracked by Bloomberg. RBA Governor Glenn Stevens said in a speech this month that global prices are facing “upward pressure” on rising demand in Asia.

Inflationary Pressure

Economists are forecasting inflation in China to accelerate to 4.6 percent this year. In India, key wholesale-price inflation unexpectedly quickened to 8.31 percent in February, led by manufactured product costs.

The extra yield investors demand to own Australian dollar corporate bonds instead of similar-maturity government debt fell to 160 basis points on March 16, the lowest since January 2008, according to Merrill Lynch index data.

The spread was last at 163, or 12 basis points more than global company bonds. The gap between the two narrowed to 3 basis points on March 16, the least since July 2009.

“Credit spreads still more than compensate for default risk and they continue to represent value for investors,” said Robert Mead, Sydney-based head of portfolio management at Pacific Investment Management Co., the Newport Beach, California-based manager of the world’s biggest bond fund.

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