Worst Bonds Are Highest, Lowest Yielding AAAs Amid Policy Stasis

  • Aussie debt lost 0.9% this month, while Swiss notes fell 1%
  • RBA `relatively stable' in view on future policy: NAB's Jolly

Australia’s sovereign bonds are trailing only Switzerland’s in handing investors the worst returns among major markets and analysts predict more weakness.

Aussie debt delivered a 0.9 percent loss this month, the most after Swiss notes among 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The benchmark 10-year yield has climbed 11 basis points since Feb. 29 to 2.51 percent as of 12:25 p.m. in Sydney on Wednesday, with the securities set for their first monthly decline since December. The weighted average estimate in a Bloomberg survey is for 2.89 percent by year-end, indicating a 1 percent loss for investors buying now.

Global equity and commodity market turmoil has settled this month, while better-than-expected growth and unemployment numbers in Australia pointed to a resilient economy. The Reserve Bank of Australia has refused to be swayed by dovishness from the Federal Reserve, Bank of Japan and European Central Bank, prompting traders to pare bets that Governor Glenn Stevens will end 10 months of policy inaction.

“The RBA has been relatively stable in terms of their views about future policy,” said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “A higher Fed funds rate, the RBA flattish and a rise in global inflation pressures with the end of the downdraft from oil and commodities should see somewhat higher bond yields as the year goes by.”

Australia has the highest 10-year yield among sovereigns that have the top grade from the three main rating companies, while Switzerland has the lowest at minus 0.34 percent. Australian debt offers 69 basis points of extra yield over similar-maturity U.S. notes, compared with 66 last month and 61 at the end of 2015.

Australian government bonds were swept up in a worldwide rally at the start of the year as tumbling stock and oil prices drove investors to pour money into the safest securities. Amid the turmoil, expectations for Fed interest-rate increases diminished and the BOJ announced negative policy rates. Dovish central bank moves have continued since, with the ECB, Reserve Bank of New Zealand and Norway all easing policy this month.

Australia’s 10-year yield slid 48 basis points during January and February, driving analysts to make their biggest cuts to yield forecasts in a year. Traders predicted on Feb. 29 that RBA would lower its benchmark rate over the next 12 months to 1.57 percent from the current 2 percent.

RBA Wagers

Those wagers were tempered in March as the RBA held the line in its two meetings this year, saying it will weigh a strengthening jobs market against the impact of recent market turbulence in deciding policy. Stevens said last week the economy is “adjusting quite well” to lower commodity prices.

Swaps now show an expectation that the RBA cash rate will be at 1.73 percent in a year, data compiled by Bloomberg show. The repricing has helped drive the Australian dollar up 6.9 percent this month.

“The modest bond losses that you would have seen have been very much outweighed by the positive currency benefits” for U.S. holders, said Jolly, who predicts the central bank won’t lower its benchmark further.

Switzerland’s central bank kept rates at a record low this month, differing from colleagues at the ECB and BOJ who have eased policy this year to keep deflationary forces at bay. The SNB was given room to stay on hold after the ECB’s stimulus failed to have much impact on the franc versus the euro, the currency of its largest trade partner.

Fed Speak

Aiding the sell-off in Australian debt has been a measure of stability in bond markets with oil climbing about 50 percent from this year’s lows and global equities rising 6.5 percent in March. Fed officials have pushed back against reduced bets for policy tightening, discussing how quickly they should raise rates a second time following a move in December. Fed Chair Janet Yellen said Tuesday it is appropriate to “proceed cautiously” in increasing rates as the global economy presents heightened risks.

“The RBA didn’t ease in March and made it fairly clear that they prefer not to, so they’ve got an easing bias but it’s not a very strong easing bias,” said David Plank, head of research at Deutsche Bank AG in Sydney. “If the Fed tightens again, I think you’ll see another bout of risk off. Our view is that you’ll see volatility through the year with very little direction.”

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