Aussie Surge Takes Sting Out of Bond Losses for Global Investors

  • Bonds' one-month loss becomes 4% gain with currency's rally
  • Australia's dependence on China makes BIL's Goetti stay away

A rally in the Australian dollar is taking the sting out of losses in the nation’s bonds for global investors, and 30-year market veteran Toshifumi Sugimoto sees further gains.

The country’s sovereign debt generated a loss of 1 percent over the past month, among the world’s worst. A surge in the Australian dollar means it has gained 4 percent in U.S. currency terms, behind only Greece and Portugal among 26 debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

Improvement in the local economy has led investors to scale back bets on Reserve Bank of Australia easing even as policy makers in Europe and Japan pursue negative-rate policies. That’s helped drive demand for the Aussie as investors hunt for yield, with 10-year notes paying 2.57 percent as of 10:25 a.m. Thursday, versus 1.91 percent in the U.S. and minus 0.05 percent in Japan. The Federal Reserve signaled Wednesday it will probably carry out two interest-rate increases this year.

“The Australian dollar will get strong because Australia has a high yield,” said Sugimoto, the chief investment officer at Capital Asset Management in Tokyo. “I’m looking at a weak yen and a strong U.S. dollar this year because the Fed may raise interest rates, but Japan’s interest rate is low. There will be more purchases by Japanese investors.”

Haven Demand

The Aussie has risen against its U.S. counterpart and fallen against the yen this year as a flight to quality in the global financial markets sent investors to the perceived safety of Japan’s currency. The trend is running its course, and interest rates will emerge as the main force driving currencies, Sugimoto said. The Australian dollar will rise about 6 percent to 90 yen by year-end, he said.

Traders are increasingly betting RBA chief Glenn Stevens will hold the nation’s benchmark rate at 2 percent as growth quickens. Yields suggest traders expect 19 basis points of interest-rate reductions in the coming six months. It was 28 basis points as recently as March 9.

Australia’s economy expanded 3 percent in the fourth quarter from the year-earlier period, the government reported this month, the fastest pace since the start of 2014.

ECB, BOJ

Central bankers in Europe and Japan are undertaking unprecedented monetary easing to revive their economies. The ECB surprised investors this month with the extent of a new stimulus package. In February, the Bank of Japan unexpectedly added negative rates to its quantitative-easing program.

The Aussie is vulnerable as economic growth slows in China, said Hans Goetti, the chief strategist for the Middle East and Asia at Banque Internationale à Luxembourg, which has $36.4 billion under management.

The two are linked because China is the biggest customer for Australia’s commodity exports, Goetti said in an interview in Singapore. A bet against the Aussie, a so-called short, will benefit as growth in the Asian nation slows, he said.

“The concern is China,” Goetti said. “If you want to short China, just short the Australian dollar. ”

National Australia Bank Ltd. has seen a jump in foreign demand for the nation’s bonds after Japan adopted negative interest rates, said Peter Jolly, the head of market research in Sydney.

“If you’re a foreign investor in Australia, you’ve gained substantially on the exchange rate,” he said.

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