Australian Bonds Drop, Treasuries May Slide on Factory Gains

Australian bonds fell by the most since September and U.S. Treasuries may decline after surveys showed manufacturing outside Europe is expanding, eroding demand for the safety of the world’s highest-rated debt.

Rallies in both markets last year will give way to losses in the first quarter as gross-domestic-product growth quickens in the nations, Bloomberg surveys of economists show. Ten-year yields will climb 29 basis points in the U.S. and 22 basis points in Australia by March 31, based on median forecasts.

“I’m cutting back on long-term maturities worldwide,” said Sungjin Park, who heads the $67.4 billion debt division in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor. “The macroeconomic picture has shown some hope. It’s better than expected.”

The 10-year Australian yield rose 16 basis points, or 0.16 percentage point, to 3.83 percent as of 5:49 p.m. in Sydney. It was the biggest increase since Sept. 27. The price of the 5.75 percent government security maturing in May 2021 fell A$1.45 to A$114.90.

Treasuries and Japanese bonds were closed in Tokyo today for Japan’s Bank Holiday. Trading of Treasuries is scheduled to take place as usual in the U.K. and the U.S., following the observance of New Year’s Day yesterday, according to the Securities Industry and Financial Markets Association in New York.

Manufacturing Growth

Australian manufacturing expanded for the first time in six months in December, according to an industry report today. Factory output also increased in India and in China, reports over the past two days showed.

In the U.S., the Institute for Supply Management’s factory index probably climbed to a six-month high of 53.4 in December, economists surveyed by Bloomberg News projected ahead of the figure today.

U.S. payrolls climbed by 150,000 in December, after a 120,000 increase in November, according to the median forecast of economists in a Bloomberg News survey before Labor Department data on Jan. 6. The Federal Reserve is scheduled to issue the minutes of its latest policy meeting today.

Treasuries rallied 9.8 percent and Australian bonds gained 14 percent in 2011, according to Bank of America Merrill Lynch indexes, on demand for the safest securities.

Australia’s 10-year yield set a record low of 3.65 percent on Dec. 30. The U.S. 10-year was 1.67 percent on Sept. 23, the least ever, and 1.88 percent at the close of last year.

The South Pacific nation has the top-level triple-A grade from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The U.S. is ranked triple-A by Moody’s and Fitch, while S&P cut the nation’s rating by one level in August.

Europe’s Crisis

Bond bulls say Europe’s fiscal crisis will maintain demand for high-rated debt. German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet in Berlin Jan. 9 to work on ways to control government spending in the region.

“We look for Treasuries to rally in the first quarter” as European governments borrow by selling bonds, said Bin Gao, head of interest-rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “Supply from Europe will be very heavy and the market may not be able to absorb all of it.”

U.S. 10-year yields will fall to 1.75 percent by end of first quarter, according to Bank of America, one of the 21 primary dealers that trade with the Fed.

Italy Auction

Italy auctioned 7 billion euros ($9.1 billion) of debt on Dec. 29, less than the 8.5 billion euros targeted. With an economy sinking into its fourth recession since 2001, Prime Minister Mario Monti’s government must refinance about $428 billion of securities coming due this year, the third-most globally, with another $70 billion in interest payments, data compiled by Bloomberg show.

After Italy, France has the most amount of debt coming due, at $367 billion, followed by Germany at $285 billion.

The amount needing to be refinanced worldwide is more than $8 trillion when interest payments are included.

“It is a big number and obviously, because many governments are still in a deficit situation, the debt continues to accumulate and that’s one of the biggest problems,” Elwin de Groot, an economist at Rabobank Nederland in Utrecht, Netherlands, part of the world’s biggest agricultural lender, said in an interview on Dec. 27.

Investors held to their bearish stance on Treasuries in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker. Ried’s index on the market outlook through June was 44 for the seven days ended Dec. 30, unchanged from the week before. A figure below 50 shows investors expect rates to increase.

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