Aussie Bonds Gaining 45% Over Six Straight Years Keep AAA Allure

  • Rebound in local dollar eases hurdle for overseas investors
  • There's still demand to buy Australian bonds, CIBC's Oh’E says

Australia’s bonds rallied for a sixth straight year in 2015, longer than any other major developed debt market except Japan, and investors say the nation’s AAA debt is still appealing in the global hunt for yield.

Aussie debt returned 3.2 percent, rounding off a 45 percent gain since the end of 2009, based on Bank of America Corp. Merrill Lynch indexes. Even after a rally in prices as the central bank cut interest rates 10 times over four years, the nation’s 10-year yield of 2.80 percent is still about half a percentage point more than similar-maturity Treasuries and 2.17 percentage points more than equivalent German bunds.

Australia’s yields, the highest among the 10 countries ranked AAA by all three major rating companies, are proving too good to pass up as central banks in Europe and Japan keep their own benchmarks near zero as the U.S. raised its key rate by a quarter percentage point to a range of 0.25 percent to 0.5 percent this month. While a mining slowdown is limiting economic growth Down Under and buoying demand for government bonds, the Aussie dollar has rallied 3.9 percent this quarter against the greenback, bolstering confidence among overseas investors.

“There’s still demand to buy the Australian currency and Australian bonds,” said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo. “That has been the case all year. It’s a good choice because it’s AAA."

Australia’s dollar has climbed more than 4 percent against its Japanese counterpart this quarter. It traded at 72.90 U.S. cents and 87.75 yen as of 5 p.m. Wednesday in Sydney.

Australian bonds fell Wednesday, following a decline in the U.S. market, sending the yield on the 10-year Aussie note up 12 basis points, the biggest increase since July.

Japan’s bond market gained 1.1 percent in 2015, headed for a 12th consecutive yearly gain as the nation faces more than a decade-long deflation threat. Australia’s winning run is still the longest among the rest of the 12 biggest developed debt markets, which are the U.S., the U.K., Italy, France, Germany, Spain, Canada, Belgium, the Netherlands and Greece, based on data compiled by Bloomberg. The South Pacific nation’s debt market ranks No. 12.

Reserve Bank of Australia Governor Glenn Stevens cut interest rates twice in 2015 and bonds rallied as iron ore, the nation’s biggest export, dropped about 41 percent this year. Investment in Australia’s mining industry has declined 39 percent from its high in 2013, the steepest decline in percentage terms since the 1990s, based on government data.

All Over

Peter Jolly, the head of market research at National Australia Bank Ltd., the nation’s biggest lender by assets, says the bond market’s winning streak is over.

The RBA is probably finished cutting, according to Jolly. The Federal Reserve will probably keep pushing U.S. rates higher in 2016, and Australia’s borrowing costs will climb along with those in the world’s biggest market, he said.

“Australian bond yields normally rise in tandem with U.S. bond yields,” Jolly said. “Now is not the right opportunity” in the local debt market, he said. Local 10-year yields will probably climb to 3.3 percent by the close of 2016, he said.

The latest Bloomberg surveys of economists show investors will just about break even next year. They project the yield will be 3.15 percent, with the most recent forecasts given the heaviest weightings. An investor who bought Wednesday would gain 0.2 percent, based on data compiled by Bloomberg.

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