Crazy Australian Prices Make Bond Yields Near 3% Less Appealing

Updated on

Australian 10-year bond yields close to 3 percent look less attractive after accounting for inflation in a nation that Deutsche Bank AG ranks as the world’s most expensive.

Benchmark yields climbed to 3.16 percent last week, the highest level since November and more than half a percentage point over what investors get in the U.S. The yield slipped to 2.98 percent Monday, meaning that after subtracting the inflation rates, investors earn just 1.68 percent in the South Pacific nation, versus 2.55 percent in the U.S. New Zealand is even more attractive at 3.72 percent.

Australia held its place as the costliest country in 2015, according to a Deutsche Bank survey of standardized goods and services such as Apple Inc.’s iPhone and transportation costs. Reserve Bank Governor Glenn Stevens said surging property prices in Sydney are “crazy,” raising concern they’ll lead him to delay cutting interest rates as he seeks to support the economy. An 18 percent decline in the local currency over the past year is also making imported goods more expensive.

“There’s an expectation that inflation will be higher in Australia than the U.S.,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd. “Australia has become relatively less attractive. There doesn’t appear to be a great yield advantage” after accounting for consumer prices, he said.

Faster Increases

Costs are rising at a 1.3 percent pace in Australia, versus almost zero in the U.S. and in neighboring New Zealand.

The difference between yields on Australia’s 10-year notes and same-maturity inflation-linked bonds, a gauge of trader expectations for consumer prices over the life of the debt, rose to 2.35 percent last week. It was the highest level in six months.

Housing prices in Sydney, Australia’s most populous city, are about 2 percent shy of the record set in May, based on the RP Data-Rismark Daily Home Value Index. The median house price in the city is A$929,842 ($717,560), according to the Real Estate Institute of Australia.

Stevens said in a speech last week he’s open to lowering interest rates further to support a struggling economy. He declined to comment when asked whether soaring property prices in Sydney would make policy makers hold off.

‘Crazy’ Sydney

“I’m very concerned about Sydney,” he said. “Some of what’s happening is crazy. But we’ve got a national focus we have to manage as well, and that just increases the complexity.”

Australia’s bonds have fallen 1.3 percent in June, versus a 1.2 percent decline for Treasuries, according to data compiled by Bloomberg.

The currency weakened to 75.33 U.S. cents in April, a level not seen for six years. It was at 77.16 cents as of 12:27 p.m. on Monday in Sydney.

Stevens may still cut borrowing costs again after reducing the nation’s benchmark to a record low of 2 percent in May, said Shane Oliver, the head of investment strategy at AMP Capital Investors in Sydney. The Federal Reserve will probably raise rates in the U.S., he said.

“That should mean Australian 10-year bond yields might fall relative to U.S. bond yields,” Oliver said. “As an investor, I’d prefer Australian bonds to U.S. or global bonds.”

It’s not time to bet on Australia’s debt, said Hideaki Kuriki, an investor at Sumitomo Mitsui Trust Asset Management in Tokyo. Rising oil costs will help drive the consumer price index higher, he said. Crude has risen about 40 percent from this year’s low.

“CPI may go up,” Kuriki said. “Oil prices will go up.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE