Aussie Bonds' Best Rally Since 2011 Sets Up Turnbull Growth Push

Prime Minister Malcolm Turnbull Announces Clean Energy Innovation Fund

Australian Prime Minister Malcolm Turnbull .

Photographer: Don Arnold/Getty Images
  • Sovereign debt returned 7.7% last quarter in U.S. dollar terms
  • Government to deliver May budget with July election possible

Prime Minister Malcolm Turnbull is signaling Australia’s path to a balanced budget will be built on growth not austerity. After the nation’s bonds delivered their biggest quarterly return in more than four years, debt investors are set to give him a warm reception.

Turnbull, a month out from the budget and facing an election as soon as July 2, signaled no plans to accelerate a return to the black in an interview on Sunday, saying fiscal restoration is a “long-term project.” A surging Australian dollar and bond yields that top those offered by most developed-market peers mean the prime minister has room to expand record government borrowing. Sovereign debt returned 7.7 percent to U.S. dollar-based holders in the first quarter as the Aussie currency climbed to a nine-month high.

“This is an election budget and it will be interesting to see how far the government is able to shift the debate toward nation-building infrastructure spending and away from deficit reduction,” said Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. “Government borrowing costs have rarely, if ever, been lower than they are today. So if you are a government that has borrowing capacity, which Australia does, and has some productivity enhancing infrastructure that needs to be done, then this could be a very good time.”

Lawmakers are weighing corporate tax cuts in an effort to jump-start growth as Australia’s decade-long mining and commodities boom draws to a close. The nation’s net debt is projected to peak at 18.5 percent of gross domestic product in 2017, lower than any Group of Seven economy, according to a presentation from the government’s official borrowing arm.

The following charts track Australia’s declining bond yields along with its growing stock of outstanding debt.

CHART 1: The yield on Australia’s 10-year bond has fallen even as the amount of outstanding debt climbs. The benchmark 10-year yield was 2.47 percent as of 3 p.m. on Tuesday in Sydney after the Reserve Bank of Australia opted to leave its cash rate unchanged at 2 percent.

CHART 2: The budget update in December, the first under Turnbull and his Treasurer Scott Morrison, saw the government revise its fiscal projections and chart a slower return to balance than had been estimated under previous leader Tony Abbott.

Chart 3: Australia’s 10-year bond yield offers a 71 basis-point premium over comparable U.S. debt, while negative policy rates in Europe and Japan means Aussie debt looks even more attractive to investors in those regions.

CHART 4: Offshore investors held 63.5 percent of outstanding Australian government debt at the end of 2015, the least in six years. While down from a 2012 peak of nearly 76 percent, the share of international holdings remains high as Australia’s yields draw investors to the nation’s assets.

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