Australia’s government bonds are forecast by economists to beat Treasuries for a third year in 2013 as Pacific Investment Management Co. says below-average global growth rates are spreading to the South Pacific nation.
Investors in 10-year Australian notes will reap a 3.7 percent gain next year if the yield is little changed at 3.36 percent, the median forecast from 19 economists surveyed by Bloomberg. Similar-dated Treasuries will deliver a 0.9 percent loss should rates rise to 2.17 percent, the result of a similar survey. Australian bonds returned 5 percent in 2012, versus 2 percent for the U.S., data compiled by Bloomberg show.
A mining investment peak and “softening” labor markets provided scope to reduce borrowing costs to a half-century low on Dec. 4, the Reserve Bank of Australia said yesterday. Pimco strongly recommends Australian bonds, as the slower global expansion it dubs the “new normal” for the developed world infects the nation and spurs further RBA rate cuts.
“The new normal is finally catching up with the Australian economy,” Robert Mead, Pimco’s head of portfolio management in Australia, said in an e-mail interview last week. “The burden of policy support will likely continue to fall on the shoulders of the RBA which will keep Australian interest rates low.”
Pimco, which is based in Newport Beach, California, runs runs the $285 billion Total Return Fund, the world’s largest. It has popularized the phrase “new normal” to describe the U.S. economy after the 2008 financial crisis. Pimco forecast slower economic growth, higher unemployment, increased savings and reduced consumption.
While the Reserve Bank is cutting borrowing costs, its target for overnight lending of 3 percent, the so-called cash rate, compares to almost zero in the U.S. Ten-year Australian notes yielded 3.38 percent at 11 a.m. in Sydney, versus 1.81 percent for Treasuries.
“Into 2013 and beyond, Pimco will continue to strongly recommend Aussie bonds as an effective anchor in balanced portfolios,” Sydney-based Mead said.
Australia’s AAA debt rating is helping lure investors, with as many as 26 central banks including those in Brazil, Russia and Germany holding the currency, according to data compiled by the Reserve Bank and Bloomberg. The South Pacific country is one of just seven nations worldwide that have top-level AAA rankings and stable outlooks from all three major rating companies. Canada, Denmark, Norway, Sweden, Singapore and Switzerland are the others.
“Australia, Japan, Switzerland, and the U.S. are identified as countries with a particularly safe investor base,” according to a report published by the International Monetary Fund on Dec. 3.
Foreign central banks and official funds quadrupled holdings of federal, state and local debt in the nation to A$140 billion as of the start of 2012, or 29 percent of the market, from A$35 billion at the end of 2008, or 16 percent, according to the report from the IMF this month.
“Australian bond yields are attractive,” said Bin Gao, head of interest-rate research for Asia and the Pacific at Bank of America Corp. in Hong Kong. “We see central banks continuing to buy. Yield-seeking behavior is still there.”
The Australian dollar rallied 3 percent this year to $1.0513 as of 5 p.m. yesterday in Sydney, according to data compiled by Bloomberg. It has surged 50 percent since the end of 2008, the most among more than 150 currencies tracked by Bloomberg.
Central bank buying has also helped drive down expectations for exchange-rate swings for the so-called Aussie by the most among developed currencies this year. Implied one-month volatility on the so-called Aussie fell to a 16-year low of 5.63 percent last week and was at 5.72 percent, down 8.7 percentage points since Dec. 31.
The cost to insure Australian bonds fell to a two-year low last month as Prime Minister Julia Gillard strives to return the national budget to surplus ahead of elections that must be held by November.
Credit-default swaps dropped to 37.9 basis points last month and traded at 41 yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts allow traders to bet on a borrower’s creditworthiness, and a decline in prices indicates improving perceptions of the government’s fiscal standing.
In the U.S., credit default swaps have risen to 33.5 basis points from this year’s low of 28.9 as President Barack Obama and lawmakers argue over how to avert the so-called fiscal cliff of $600 billion in tax increases and spending cuts that will come into effect in January unless Congress acts.
The spread between the prices of the two contracts of 7.5 basis points compares with the average of 27 in 2012.
Australian company bonds returned 11 percent this year, Bank of America Merrill Lynch indexes show. The extra yield investors demand to hold corporate securities instead of sovereign notes narrowed to 1.57 percentage points yesterday from 2.92 percentage points at the close of 2011.
Australian business confidence plunged to the lowest level since 2009 in November as companies struggled with a weaker global outlook, a private survey showed this month.
Interest-rate swaps trading indicates a 56 percent chance the RBA will cut the overnight cash-rate target to 2.50 percent or lower by June. The all-time low for Australia’s benchmark borrowing cost was 2.89 percent in January 1960, according to RBA data.
Australia & New Zealand Banking Group Ltd. said Dec. 17 it expects the RBA to cut rates to 2 percent by the end of 2013. Commonwealth Bank of Australia, the nation’s largest lender, forecast a reduction to 2.5 percent or less, helping push the 10-year government yield to 2.5 percent by June 30.
“The underlying economic story in Australia is one that’s more conducive to lower yields now than in the past,” said Adam Donaldson, Sydney-based head of debt research at Commonwealth Bank. “There’s a very strong need for the non-mining economy now to expand at a faster pace and the evidence of that occurring is pretty limited. The burden of stimulating demand falls very firmly on to the cash rate.”