Japanese investors are selling record amounts of Australian debt, betting a rout in the yen that sent it to a four-year low against the Aussie dollar has run its course.
The biggest investors in Australia’s bonds cut holdings by 652.6 billion yen ($7 billion) over November and December, the most in Ministry of Finance data going back to 2005. Benchmark 10-year yields climbed 57 basis points since Sept. 30, heading for the longest stretch of monthly increases in 3 1/2 years. Australian government bonds returned 37 percent in yen terms over the past five years, the most among 26 developed markets tracked by Bloomberg.
The yen tumbled against the so-called Aussie and other currencies over the past six months as Japanese Prime Minister Shinzo Abe prodded the central bank to pump money into the economy. The currency is reaching “equilibrium” against the U.S. dollar, Kazumasa Iwata, a former deputy head of the Bank of Japan and a candidate to take over as the next central bank governor, said last week. Not only is investing in Australia expensive, improvement in Europe’s debt crisis is curtailing demand for the haven of Australia’s AAA rated debt.
“Because of the Australian dollar appreciating against the yen, investors are getting quite a good return,” said Yoshisada Ishide, who manages the Daiwa SB Short-Term Australian Dollar Bond Open Fund, Asia’s largest bond fund dedicated to investing in the nation. “For the past three months, it has been one-way appreciation. It’s a chance to diversify into equities and other high-yielding currencies.”
Dumping Aussie Bonds
The fund shrank to 985 billion yen on Feb. 14 from as high as 1.33 trillion yen in March.
Japanese retail investors -- often called Mrs. Watanabe as a reference to housewives who control family budgets -- dumped A$10 billion ($10.3 billion) of Australian retail bonds in the year to January, Westpac Banking Corp. said in a note to clients last week. The value of investment trusts sunk into Australia fell by A$12 billion 2012, the bank said, citing figures from the Investment Trust Association of Japan.
The Aussie strengthened to 97.44 yen this month, the highest level since August 2008. It has surged 15 percent versus its Japanese counterpart over three months, the eighth-biggest gain among the Group of 10 currencies, according to data compiled by Bloomberg.
The Australian dollar traded at 96.79 yen as of 3:52 p.m. in Sydney.
Against the U.S. dollar, the yen fell to 94.46 last week, the least since May 2010. An exchange rate of 90 to 100 per dollar represents a return to “equilibrium,” Iwata said Feb. 14.
Japan is punishing its trading partners by guiding the yen lower, Eisuke Sakakibara, a former Ministry of Finance official, said last week.
Japanese investors aren’t ready to give up on Australia, said Ishide, who met with 100 customers at a seminar in Kyoto last week. They may buy again if the Australian dollar weakens to 80 yen, he said.
The yen slid 0.7 percent to 94.11 per U.S. dollar today after Group of 20 nations refrained from censuring Japanese policies. Two days of talks between G-20 finance ministers and central bankers ended in Moscow on Feb. 16 with a statement pledging not to “target our exchange rates for competitive purposes,” without singling out Japan.
The Daiwa SB Short-Term Australian fund returned 22 percent in the past year, ranking behind more than half of its peers, according to data compiled by Bloomberg.
Australian debt returned 1 percent in the past six months, according to indexes compiled by Bloomberg and the European Federation of Financial Bank of Analysts Societies. The gain turns into 18 percent when adjusted for yen-based investors.
Ten-year government bond yields rose five basis points, or 0.05 percentage point, to 3.57 percent. They were as high as 3.61 percent this month, a level not seen since May.
Reserve Bank of Australia Governor Glenn Stevens cut the target for overnight lending between banks to a 50-year low of 3 percent in December. Interest-rate swaps data compiled by Bloomberg show investors expect at least one more reduction in 2013. Benchmark rates are close to zero in the U.S. and Japan.
Traders see a 38 percent chance of a March rate cut, down from 58 percent odds on Feb. 6, the day after the RBA decided to hold the benchmark unchanged at its first policy meeting for 2013, the data show.
Relative yields on corporate notes dropped this year on speculation improving global growth and 1.25 percentage points of central bank rate cuts in 2012 will bolster Australia’s economy as a record mining investment boom fades. The spread between company yields and sovereigns shrank to 145 basis points on Feb. 15, matching the lowest since December 2007, Bank of America Merrill Lynch data show.
Investors expect Australian inflation to hold in the central bank’s target range of 2 percent to 3 percent, bonds indicate. The difference between yields on 10-year notes and same-maturity inflation-linked bonds, a gauge of trader expectations for consumer prices over the life of the debt, declined for a second week to 2.72 percentage points.
A second reason investors are selling Australian bonds is that the flight to quality caused by Europe’s debt crisis is fading. Australia, which has stable top-level debt rankings from Standard & Poor’s Corp., Moody’s Investors Service and Fitch Ratings, benefited as investors sought havens amid concern one or more European governments would default.
“The recent rapid improvement in financial conditions in Europe means ‘normalization trades’ suddenly came back in vogue -- in other words ‘safe haven’ assets were dumped for ‘growth’ assets,” Robert Rennie, chief currency strategist at Westpac in Sydney, wrote in a report this month.
“The worst is over, but what we still have to do is difficult,” Luxembourg Prime Minister Jean-Claude Juncker said in January.
What the Japanese do is especially important because they are among the largest holders of Australian debt.
“Japanese flows into Australia have historically moved the market,” said Annette Mullen, Sydney-based head of rates in Colonial First State Global Asset Management’s fixed interest and credit team, which manages about A$25 billion. “There’s still a reasonably wide range of views of what’s going to occur with the BOJ over the period ahead. For me that’s something that we managing money in Australia need to continue to remain on top of, because it can impact a lot of markets in Australia.”
Japanese investors held 13.98 trillion yen of debt denominated in Australian dollars as of the end of 2011, based on the latest figures available from the Bank of Japan. At the time, the figure was equivalent to A$178.1 billion. The size of Australia’s sovereign bond market was A$210.3 billion, according to data compiled by Bloomberg. Long-term debt securities issued by governments and corporations in Australia totaled A$832.7 billion, RBA data show.
“There tend to be more outflows from my fund when the Australian dollar appreciates,” said Hideya Kubo, a senior money manager in Tokyo at Diam Co. who oversees the equivalent of $5 billion. “Investors may be waiting for the opportunity to buy Aussie assets at cheaper levels.”