Bond Sales Surge to Record as Spreads Shrink: Australia Credit

Bond sales in Australia climbed to a record for the first half after banks, companies and top-rated foreign borrowers took advantage of yields that dropped to a three-year low relative to government debt.

Offerings totaled A$62.1 billion ($65.4 billion), the most ever in data compiled by Bloomberg going back to 1999. Investors drove securities sales up 7 percent from the year-earlier period as commodity exports to China spur faster economic growth than the U.S. and Europe. The developed world’s highest interest rates pushed up the so-called Aussie dollar 22 percent the past 12 months as countries including Russia and Thailand said they will add the currency to their foreign-exchange reserves.

“Australia is viewed as a way of investing in the China story in a well-regulated form,” said John Sorrell, head of credit at Tyndall Investment Management Australia Ltd. in Sydney, which manages about A$15 billion of fixed-income assets. “It’s also attracting investors because it’s not the U.S., which is still challenged, and it’s not Europe with a Greek debt crisis.”

The extra yield investors demand to hold corporate notes instead of Australian government bonds dropped to 157 basis points, or 1.57 percentage points, last month, the lowest since January 2008, Bank of America Merrill Lynch indexes show. The gap fell to within three basis points of the spread for global company debt in March, the smallest difference in almost two years.

Highest Returns

Australian company debt returned 33 percent in the past year in U.S. dollar terms, the best performance among six developed corporate markets tracked by Merrill Lynch indexes and outpacing the 13 percent advance for a gauge of global debentures.

Reserve Bank of Australia Governor Glenn Stevens said June 15 he will probably need to raise interest rates from 4.75 percent at some stage to cool inflation as China-led demand for the country’s commodities is expected to drive the fastest economic growth in a decade.

Federal Reserve Chairman Ben S. Bernanke said June 22 that the U.S. economic recovery was proceeding “somewhat more slowly” than expected, prompting the Fed to keep its balance sheet at a record to spur slowing growth. European Central Bank President Jean-Claude Trichet said the same day that risk signals for financial stability in the euro area are flashing “red” as Greece’s debt crisis threatens to infect banks.

The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. and resulted in European governments setting aside more than $5 trillion to support banks.

Kangaroo Bonds

Bond sales in Australia in 2011 have included A$22.2 billion of notes sold by foreign issuers such as Goldman Sachs Group Inc., a record for a half-year, according to data compiled by Bloomberg.

Kreditanstalt fuer Wiederaufbau is the most prolific issuer of so-called kangaroo bonds, with Germany’s state-owned development bank raising A$4.75 billion, the data show.

“Besides the constant bid from domestic banks and real money investors, we increasingly have seen central banks diversifying into the Australian currency,” said Klaus-Peter Eitel, vice president of capital markets at KfW, in an e-mailed response to questions from Bloomberg. “We assume that this is a result of increasing reserves and a diversification away from U.S. dollars as a result of the relatively favorable Australian fiscal and economical situation.”

Russia, Thailand

Russia’s central bank plans to hold as much as 1 percent of its $528 billion reserves in Australian dollars and start buying the assets as early as September, Deputy Chairman Alexei Ulyukayev said June 17 in St. Petersburg.

The Bank of Thailand bought more Australian dollar assets recently, Governor Prasarn Trairatvorakul said May 12.

Australia’s government plans to issue A$53 billion of securities in the year to June 2012, according to a May 11 statement. The International Monetary Fund forecasts the nation’s sovereign-debt burden will shrink to 21.8 percent of gross domestic product in 2015 from 22.3 percent last year, making it the smallest among developed nations after Estonia’s 5.2 percent.

“The Aussie dollar bond market is on the strategic radar for a lot of issuers globally,” said James Houstone, a debt capital markets director at Royal Bank of Scotland Group Plc in Sydney. “You’re seeing very large order books for the right type of issuer” as investors are drawn to the strong currency, he said.

Longest Since Lehman

Australian two-year bonds are poised for the longest rally since Lehman collapsed in 2008, on concern Europe’s debt crisis will derail the nation’s fastest expansion in a decade.

The yield on the securities has dropped 24 basis points since March 31 to 4.67 percent as of 3:05 p.m. in Sydney, set for the first consecutive quarterly declines since the final six months of 2008. The premium over U.S. Treasuries of similar maturity has widened 23 basis points in the period to 432 basis points.

The RBA’s benchmark cash rate has remained unchanged for the past six meetings, the longest stretch since 2007.

“While there had been additional evidence of the coming strong pick-up in investment in the resources sector, activity remained quite subdued in some other important parts of the economy,” the RBA said in minutes of its June 7 meeting released June 21. That reflects ”the board’s earlier actions as well as the appreciation of the exchange rate,” policy makers said.

Record Currency

The Australian currency reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, as demand for iron ore and coal from China and India drives the nation’s biggest mining investment boom. It traded at $1.0538 today in Sydney.

The central bank forecast growth in 2011 at 4.25 percent, the fastest pace since 1999, in a May 6 report. Consumer prices will rise 3.25 percent over the period and core inflation will accelerate to 3 percent from 2.75 percent, it said.

The Fed lowered its forecast for the U.S. economy this year to no more than 2.9 percent growth on June 22, down from April’s top-end forecast of 3.3 percent. The ECB forecast the 17-nation euro-area economy will grow 1.9 percent in 2011, in estimates published June 9.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors expect consumer prices will rise an annual 2.75 percent for the next five years. The central bank aims to keep inflation between 2 and 3 percent on average.

Westfield Retail Trust sold A$900 million of 5.5-year notes in April, a record offering in Australian dollars for a property trust and the largest non-financial corporate debt issue in the nation this year, according to data compiled by Bloomberg.

Bank Sales

Australia’s four biggest lenders sold A$14.6 billion of notes domestically in the first half, a 31 percent increase from the same period of 2010, the data show.

Westpac Banking Corp. leads the underwriter rankings with a 19 percent market share, followed by Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd.

While Australia’s bond market is expanding, it remains dwarfed by the U.S. Sales in the world’s biggest debt market have totaled $697 billion this year, Bloomberg data show.

China surpassed the U.S. and Japan to become Australia’s largest economic partner as bilateral trade quadrupled over the past seven years to A$97.6 billion in 2010, according to Australian government data. China took 27 percent of the nation’s exports in January.

“Australia is well placed to leverage off the Asian growth story through commodities,” said Scott Rundell, head of credit research at ING Investment Management in Sydney, which manages about A$15 billion of fixed-income assets. “That helps our economic resilience and makes our debt market more attractive.”