Pimco Welcoming Three More Years for Stevens: Australia Credit
Glenn Stevens’s reappointment to the helm of Australia’s central bank was welcomed by investors who profited as he presided over the world’s strongest currency and second-best bonds.
Australian sovereign debt gained 54 percent since Stevens became Reserve Bank governor in September 2006, the most after New Zealand among developed nations. The so-called Aussie dollar climbed against all 16 major peers in the period and was the best performer against the greenback, surging 39 percent.
The economy will outpace other major developed nations in the coming three years, Bloomberg surveys of economists show, extending an unrivaled two-decade-long expansion that coincided with recessions in many countries since 2008. Stevens’s ability to foster growth without spurring inflation was proved as he first cut borrowing costs in 2008-2009, increased them in 2009-10 and dropped them back down from 2011.
“Continuity of pragmatic RBA governance in today’s world of political and central bank leadership fluidity is welcomed,” said Robert Mead, head of portfolio management at the Sydney office of Pacific Investment Management Co., the manager of the world’s largest bond fund. “Australia is one of few countries to have undertaken an interest rate cycle since the crisis began, with rates now back at their 2009 lows.”
Stevens, 55, joins People’s Bank of China Governor Zhou Xiaochuan in getting an extension to his term while the European Central Bank and Bank of Japan are among central banks that have seen a change of leadership.
Australia’s economy will expand 2.9 percent a year on average through 2015, compared with 2.5 percent for the U.S., 2.3 percent for Canada and 2.7 percent for New Zealand, Bloomberg surveys show. Gross domestic product rose at the fastest pace in five years in 2012 as the central bank lowered its benchmark rate to 3 percent in December to manage a peak in the nation’s resources investment boom. The RBA previously increased borrowing costs to 4.75 percent in November 2010 from 3 percent in September 2009 to curb price pressures.
Consumer prices rose 2.3 percent last year, based on measures the RBA favors that strip out the more volatile items, below the middle of the central bank’s target range.
Stevens’s seven-year term was set to end Sept. 17, just three days after a Federal election, and was extended by three years at the governor’s request, Treasurer Wayne Swan told reporters yesterday. Stevens has presided over annual inflation that’s averaged 2.8 percent and unemployment of near 5 percent, compared with inflation of 3.3 percent and a jobless rate averaging 5.8 percent in the six years before he took on the post on Sept. 18, 2006.
At 3 percent, Australia’s key rate is the highest among major developed nations, with borrowing costs near zero in the U.S., Japan and U.K.
The nation’s 10-year bond yield was at 3.41 percent, up from 3.27 percent on Dec. 31, and 1.60 percentage points higher than similar-maturity U.S. Treasuries. It offers a premium of 1.85 percentage points over the average rate in the nine other nations that hold a AAA credit score from the three main credit assessors.
Australian government bonds delivered gains of 41 percent in the six years before Stevens became governor, the 12th-best performance among 21 major sovereign markets covered by Bank of America Merrill Lynch indexes.
“He’s done a good job balancing growth and inflation,” said Yoshisada Ishide, who manages the $10.2 billion Daiwa SB Short-Term Australian Dollar Bond Open Fund. “His reappointment gives me more confidence in the RBA.”
Stevens, who faced criticism in April 2008 for being too hawkish, rebuilt his reputation later when he helped guide Australia through the global crisis that started with the September 2008 collapse of Lehman Brothers Holdings Inc.
Politicians, retailers and one of his predecessors had accused Stevens of being too aggressive when he increased the key rate by 50 basis points in the first quarter of 2008 to 7.25 percent, the highest level in more than 13 years to counter the effects of a record mining boom. Sydney’s Daily Telegraph led its front page on April 5, 2008, with a picture of Stevens and the headline: “Is This The Most Useless Man in Australia.”
Stevens then responded to the global credit crunch by cutting rates 4.25 percentage points from September 2008 to April 2009.
Ishide’s fund, the largest among those dedicated to investing in Australia, is “overweight” on state, supranational and corporate debt. He may increase his allocation to government bonds if yields climb further, he said.
Offshore buyers include central banks managing as much as $7 trillion, that held 70 percent of Australia’s total outstanding debt as of Dec. 31, according to government data compiled by Bloomberg.
That demand has kept the Australian dollar, the world’s fifth most-traded currency above $1 for a record nine months. It bought $1.0478 as of 12:01 p.m. in Sydney and will probably be at $1.03 by year-end, according to the median forecast of analysts surveyed by Bloomberg.
The currency’s strength poses a challenge for Stevens in his new term as he attempts to rebalance a two-speed economy as mining regions thrive off Chinese demand while manufacturers struggle. Australia is near the peak of its record resource investment boom and spending in non-mining sectors remains subdued, the RBA has said.
Almost one in 10 jobs in the nation is tied to resource extraction and industries that service it, double the level in the mid-2000s, a central bank paper showed Feb. 20. Having raised rates to 4.75 percent in 2010 to complete the most aggressive increases among major developed nations after the credit crunch, Stevens brought the rate back to match a half- century low at the end of 2012.
“Pimco believes this return to a 3 percent policy rate underlines the growth challenges the Australian economy faces while the Australian dollar remains elevated and investment and fiscal stimulus subside,” said Mead.
The central bank said April 2 there are signs its policy easing is having the desired effect. In February, retail sales climbed four times faster than economists forecast, employers added 71,500 jobs and the nation’s trade deficit unexpectedly shrank to a 14-month low. Consumer confidence rose in March to the highest level since December 2010.
A private report showed dwelling values across Australian capital cities climbed 2.8 percent in the first three months of this year, the biggest quarterly increase since 2010.
“The RBA has done an excellent job and Governor Stevens has the confidence of investors,” said Annette Mullen, Sydney- based head of rates at Colonial First State Global Asset Management’s fixed interest and credit team, which manages about A$25 billion. “There are early signs previous easings are working in Australia and we expect stable monetary policy going forward with a bias to ease if we don’t continue to see positive signs from housing and private consumption, or the Australia dollar moves higher.”
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