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Australia Banks State Bond Buying Reaches Record

Australian banks boosted their holdings of state government bonds to a record last quarter to help meet new rules on assets aimed at making lenders more resilient against financial crises.

Banks held A$70.7 billion ($74 billion) of bonds issued in Australia by regional governments as of Sept. 30, or 34.7 percent of the debt outstanding, according to data published by the Bureau of Statistics in Sydney today. The A$10.2 billion increase was also an all-time high. Foreigners cut their stakes to A$68.9 billion, from A$70 billion on June 30, the first reduction since the second quarter of 2011, the data show.

Lenders added A$21.5 billion of state bonds this year, or 88 percent of the regions’ net issuance, as they prepare to meet Basel III regulations that seek to prevent a repeat of the 2008 global credit freeze. Liquidity rules slated to come in globally from 2015 would force banks to hold enough easy-to-sell assets to survive a 30-day squeeze. State bonds, also known as semis, are among Australian assets that qualify.

“Banks keep buying semis for regulatory purposes and that will likely continue,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “We have seen a slowing in sector rotation out of governments into semis over the past quarter. I think that relates to a growing concern about the ratings outlooks for the sector as a whole.”

Budget Outlooks

Queensland, New South Wales and South Australia all reported deteriorating revenue today as the nation’s mining boom peaks, in budget updates for the middle of the fiscal year that started July 1.

Fitch reduced Queensland state’s ranking to AA from AA+ on Sept. 13. Moody’s Investors Service revised the outlook on its Aa1 rating to negative from stable on Nov 26. Standard & Poor’s currently has the state at AA+, the second-highest grade, with a stable outlook.

Queensland has about A$77 billion of outstanding bonds, according to data compiled by Bloomberg.

Local banks’ holdings exceeded foreign investments for the first time since the third quarter of 2005.

Semi-government debt returned 7.75 percent this year, according to Bank of America Merrill Lynch. Average yields on state debt fell as low as 3.31 percent in October, the least in Bank of America Merrill Lynch index data starting in 1992.

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