AMP Capital Investors Ltd., Macquarie Funds Group and BT Investment Management Ltd. are betting on the bonds of Australia’s banks in 2013 after leading returns among the nation’s debt managers in the fourth quarter.
AMP Capital Corporate Bond Fund gained 2.3 percent in the three months to Dec. 31, followed by Macquarie Core Plus Australian Fixed Interest Fund’s 1.8 percent and BT Enhanced Credit’s 1.5 percent, according to Morningstar Inc. The 0.7 percent average return for 22 portfolios tracked beat the 0.2 percent for the nation’s broad market bond index, the data show.
The investors all favor Australian financial notes that are beating government bonds for an eighth month as central banks from Europe to the U.S. pour unprecedented amounts of cash into their economies, spurring funds to buy higher-yielding assets. AMP and Macquarie are also buying residential mortgage-backed securities as property prices recover after the central bank cut its benchmark lending rate to a half-century low of 3 percent.
“Globally and in Australia, we’ve seen good demand for income from corporate bonds,” said Jeff Brunton, who oversees AMP’s top-ranked A$1.8 billion bond fund as head of credit. “When markets do get the inevitable jitters, corporate debt buyers will be well-supported.”
Brunton favors securities issued by Australian and U.S. financial firms and domestic RMBS.
A second Macquarie offering and Perennial Australian Bond Fund rounded out the top five in the Morningstar rankings, as they benefited last quarter from the best returns for corporate paper relative to sovereign debt since June 2009.
The bonds of banks, states and top-rated overseas borrowers rose last year as the European Central Bank pledged to buy unlimited amounts of government debt to counter speculation of a euro breakup. The Bank of Japan said Jan. 22 it will shift to Federal Reserve-style open-ended asset purchases.
In Australia, the central bank has lowered rates six times since Nov. 1, 2011, to spur the non-mining economy as a commodities investment boom cools.
The extra yield investors demand to purchase Australian corporate debt instead of government securities dropped to 149 basis points on Jan. 29, the least since January 2008, and down from 286 a year ago, Bank of America Merrill Lynch data show. It narrowed by 135 basis points last year.
“Whilst we have a positive credit outlook, the velocity of credit spread contraction has been slowing in January,” said Justin Davey, who oversees about A$560 million in the BT Enhanced Credit Fund. “The strong credit market rally in the second half of 2012 is unlikely to be replicated in 2013.”
After benefiting from positions in financial companies and industrial names like Wesfarmers last year, Davey continues to favor those holdings along with debt by infrastructure firms.
The Merrill Lynch corporate bond index returned 0.04 percent to investors since Dec. 31 after gaining 11.5 percent in 2012 to beat global peers for a third year.
The bonds of financial firms climbed 0.2 percent this year and the yield they offer over sovereign securities slid to 147 basis points from 157 on Dec. 31. Industrial notes declined 0.2 percent and offered a spread of 167 basis points over government securities, down from 172 at the end of last year.
“The chase for yield continues,” said Joris Hillmann, who helps oversee the equivalent of $31.4 billion as senior portfolio manager for fixed income at Macquarie Funds Group, a unit of the country’s largest investment bank. “Markets at the moment are more willing to take risk on the belief that central banks and governments will continue to provide unprecedented levels of support.”
The rate on 10-year Australian government bonds rose 20 basis points this week to 3.52 percent as of 1:57 p.m. in Sydney, extending its advance from 3.27 percent on Dec. 31. The yield touched a record low 2.698 percent on June 4. Similar-maturity U.S. Treasuries were yielding 2.01 percent.
Australia’s sovereign debt fell 0.8 percent in January, a poised for a fourth month of declines. The drop was the smallest among nations with AAA grades from all three major ratings companies, as Prime Minister Julia Gillard’s pledge to return the budget to surplus supports demand for the country’s bonds.
Gillard said today that Australia will hold elections on Sept. 14, giving her minority Labor government almost eight months to close the gap in opinion polls with Tony Abbott’s Liberal-National opposition.
Macquarie’s Hillmann is buying some state-government bonds, investment-grade bank debt and RMBS, while holding fewer Australian-dollar notes sold by highly-rated overseas borrowers than the benchmarks he uses to gauge performance.
The debt of the nation’s six states and two territories -- often referred to as semi-government securities -- lost 0.6 percent in January following an 8.5 percent gain last year, Merrill Lynch data show. An index that includes state debt and kangaroo bonds, or Australian notes issued by overseas borrowers, is poised for a 0.5 percent decline, the indexes show.
Glenn Feben, head of fixed interest at Perennial, also favors state debt, particularly securities issued by the nation’s largest semi-government borrower Queensland. He doesn’t hold any sovereign securities, judging yields are too low.
“Spreads continue to be moderately attractive,” said Feben, who oversees about A$6.5 billion. “In what is likely to be a reasonably stable yield environment, the value of additional yield is important and hence we continue to run overweight positions in,” financial and state debt, he said.