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Bond Auction Demand Sinks to Least Since ’08: Australia Credit

Reserve Bank of Australia Governor Glenn Stevens
Glenn Stevens, governor of the Reserve Bank of Australia, indicated Oct. 4 that he’s willing to cut the developed world’s highest benchmark interest rate “should that prove necessary.” Photographer: Patrick Hamilton/Bloomberg

Investor demand for Australian bonds at government auctions fell to the weakest in more than three years as yields held below the cash rate for two months and amid signs the domestic economy remains resilient.

Tenders in September drew bids worth 2.3 times the securities offered, the smallest average bid-to-cover ratio since January 2008, and compared with as high as 4.8 in April. Demand at sales of 10-year U.S. Treasuries averaged 3.2 this year, up from 3.09 in 2010 and heading for the strongest year since at least 1994, according to data compiled by Bloomberg. A Sept. 28 sale of Australia’s 2021 security drew the weakest demand for any of the nation’s auctions since January 2010.

Investor demand for Australian debt, the world’s best-performing sovereign bonds in the past year, is faltering after the nation’s exports grew to a record and consumer spending outpaced economists’ forecasts. Yields on 10-year notes rose a fifth day, the longest stretch of gains since February, after German Chancellor Angela Merkel and French President Nicolas Sarkozy committed to devising a plan to recapitalize European banks and address Greece’s debt crisis.

“The tone of the auctions has been weaker for a while,” Adam Donaldson, head of debt research at Commonwealth Bank of Australia said in an telephone interview from Sydney. Certain buyers “are staying out of the market a bit at these unappealing yields,” he said.

Rally Falters

All Australian government bonds, the longest-dated of which mature in 2023, have yielded less than the Reserve Bank of Australia’s 4.75 percent key rate since Aug. 9. Offshore investors held 75 percent of the nation’s bonds as of June 30, according to data from the central bank and statistics bureau.

Benchmark 10-year government bonds fell for a second week in the five days ended Oct. 7 and yields have advanced to 4.33 percent from 4 percent on Oct. 4, the least since January 2009. Yields are 219 basis points, or 2.19 percentage points, more than U.S. Treasuries of similar maturity, down for this year’s high of 248 basis points on Aug. 10.

Ten-year Australian yields rose four basis points today, paring this year’s drop to 122 basis points. A gain in October would halt nine months of declines, the longest stretch since at least 1978.

Auction Results

A Sept. 28 auction of the May 2021 security drew bids worth 1.58 times the amount offered, bringing the average for 10-year bond auctions in Australia this year to 2.8, according to data from the Australian Office of Financial Management. An Oct. 7 auction for notes maturing in June 2014 had a bid-to-cover ratio of 3.3, the lowest for a security due that year since May.

“Longer-dated bonds typically benefit less from the flight-to-safety bid than the front end of the curve enjoys,” said Commonwealth Bank’s Donaldson. “We are suggesting that the yield curve is going to steepen in Australia with the front-end getting a lot of support from this view that the RBA could cut rates and the back-end struggling a bit.”

Commonwealth Bank predicts the difference between three-and 10-year bond yields will widen toward 95 basis points by December from 63 today. That gap is 163 for U.S. securities of similar maturities and 80 for Japan.

The bid-to-cover ratio at the U.S. Treasury Department’s Sept. 29 auction of seven-year notes rose to 3.02 from 2.76 at the last seven-year note sale. A Sept. 28 sale of five-year notes saw the coverage ratio rise to 3.04 from 2.71.

Rate Outlook

Japan’s auction of 20-year debt on Sept. 13 drew bids for 3.39 times the amount of bonds available, the most since May, and the last 30-year sale on Sept. 6 drew a higher price than traders expected.

RBA Governor Glenn Stevens indicated Oct. 4 that he’s willing to cut the developed world’s highest benchmark interest rate “should that prove necessary.”

Three of 21 economists surveyed by Bloomberg News predict the RBA will lower rates to 4.5 percent at the next policy meeting on Nov. 1. Eighteen expect no change. The central bank will reduce its benchmark by 133 basis points within a year, according to a Credit Suisse Group AG index based on swaps.

Australia is the only developed nation to avoid the global recession of 2009 as the nation benefited from demand for its commodities from countries including China and India.

Record Exports

The nation’s exports surged to A$28.4 billion ($27.9 billion) in August on coal shipments, and the A$3.1 billion trade surplus was the second-widest on record, the Bureau of Statistics said Oct. 4. Retail sales rose more than economists forecast for a second-straight month in August, data the following day showed.

An Oct. 13 report is forecast to show Australian employers added 10,000 jobs last month, ending two months of declines, according to a survey by Bloomberg News.

“We may have seen the low in yields for this cycle,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “People want to be short here, but it’s hard when all it takes is for one tactless politician or some headline in Europe to reverse any run-up in yields. You’re very exposed to those risks and it’s hard to hedge against them.”

The Markit iTraxx Australia index fell 10 basis points to 199 as of 3:18 p.m. in Sydney, Westpac Banking Corp. prices show. A close of 199 would be the lowest since Sept. 21, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Bond Returns

The extra yield investors demand to hold Australian corporate bonds instead of government debt fell to 248 basis points on Oct. 11, after reaching 249 on Oct. 6, the highest since August 2009, Bank of America Merrill Lynch data show.

Australia’s sovereign debt returned 9.6 percent over 12 months, the best performance among 26 markets tracked by Bloomberg/EFFAS indexes, as investors sought alternatives to assets denominated in dollars and euro as both regions struggle to curb deficits and support growth.

Under rising pressure to defuse turmoil that’s raged for 18 months, and facing growing concern Greece is headed to a default, Merkel said Oct. 9 that European leaders will do “everything necessary” to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.

European Central Bank council member Erkki Liikanen said yesterday that Europe’s banks are encountering difficulties in obtaining funding on the markets.

Bank Rates

“The lack of long-term funding is crimping investment,” Liikanen, who also heads the Bank of Finland, said in a television interview on Finland’s YLE TV1. He said the main responsibility for recapitalizing banks lies with the owners.

The spread between the interest Australian banks pay when borrowing from each other for three months and swaps tracking expectations for the RBA’s benchmark rose two basis points to 34 basis points. The gap, which is a gauge of banks’ difficulty in accessing funds, closed at 61 basis points on Aug. 8, the highest since January 2009.

The Australian dollar, the world’s fifth-most traded currency, traded at 99.60 U.S. cents as of 3:20 p.m. in Sydney, after gaining 2.3 percent yesterday, the steepest advance in more than a year.

“In the absence of a sharp slowdown in China and significant falls in Australia’s key commodity prices of coal and iron ore, it’s hard to see the RBA slashing interest rates by the 150 basis points currently priced by the market,” Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd., the nation’s largest lender to businesses, wrote in a note yesterday. “Without a sharp compression in the Australian dollar’s official interest-rate advantage it’s hard to see the currency being sustained below parity.”

The RBA’s commodity price index, measured in Australian dollars and based on 18 major raw materials exported by the nation, rose to 115.4 in September, the highest since November 2008, a report showed Oct. 4.

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