Pimco Sees Hyperactive Aussie Easing Aiding AAA Gains
Australian government bonds are poised to extend the best rally among top-rated nations as local policy makers cut interest rates in response to global monetary easing, according to Pacific Investment Management Co.
“Hyperactive monetary policies underway across the vast majority of the developed world” will keep the Australian dollar strong, Robert Mead, head of portfolio management at Pimco’s Sydney office, said at the Bloomberg Australia Economic Summit this week. “The escape valve becomes monetary policy once again and that probably starts to show up sooner rather than later.”
The country’s 10-year yields fell 31 basis points over the past month to 3.31 percent, the biggest drop among 10 sovereign markets with AAA scores from all three major ratings companies. The notes offer more than twice the average for top-rated peers even after the yield plunged 2.3 percentage points in two years.
The Aussie dollar reached a 28-year trade-weighted high this week after the Bank of Japan (8301) surprised forecasters on April 4 by doubling monthly bond purchases to almost match the Federal Reserve’s extraordinary monetary easing. The erosion in export earnings, along with a slowdown in China, will damp Australia’s economy and pressure the Reserve Bank to cut rates to a record, according to Pimco, which runs the world’s biggest bond fund.
The RBA’s trade-weighted index, which tracks the so-called Aussie dollar against the currencies of 21 nations that account for at least 90 percent of the country’s commerce, rose to 80 yesterday, the highest since February 1985. The currency bought $1.0551 as of 7:06 a.m. in London, extending its record nine- month run above parity with the greenback.
The Australian dollar’s strength has also helped boost gains for bonds, pushing the benchmark 10-year yield to 3.18 percent on April 8, the lowest level this year. Similar-dated Norwegian debt has the second-highest rate among AAA rated notes at 2.19 percent yesterday.
Bonds rallied globally after the BOJ’s announcement sent Japan’s 10-year yield to a record-low 0.315 percent on April 5.
“It’s still primarily a yield story that’s attracting this portfolio capital into Australia,” Ray Attrill, the Sydney- based global co-head of currency strategy at National Australia Bank Ltd., said at the Bloomberg summit this week. “Until that advantageous yield differential, either in nominal terms or in real terms, is going to seriously reverse, we shouldn’t be realistic about thinking that we’re going to see a major collapse in the Australian dollar.”
Three-quarters of 60 central banks polled in February said they are investing in or may buy Australian dollars, Royal Bank of Scotland Group Plc said April 7, citing a survey of officials supervising a combined $6.7 trillion of reserves.
The Australian and Canadian dollars will be separately identified in International Monetary Fund data on official reserve holdings from the third quarter, the Washington-based lender said in an e-mailed response to questions.
Indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show Australian bonds due in a year or longer have climbed 0.5 percent since April 4, when BOJ Governor Haruhiko Kuroda unveiled unprecedented stimulus measures, including boosting monthly asset purchases to 7.5 trillion yen ($75 billion) and removing a limit on debt maturities. Kuroda aligned with counterparts in the U.S., U.K. and Europe in using unconventional policies to boost growth.
In contrast, RBA Governor Glenn Stevens led the developed world in raising rates after the 2009 global financial crisis, before renewed turmoil prompted him to bring down borrowing costs to match a half-century low of 3 percent.
Stevens and his board may be reluctant to take the overnight cash-rate target below the current level, said Cameron Clyne, National Australia Bank’s chief executive officer.
“There is probably a bias to hold if they can,” Clyne said yesterday in an interview. “They’ll want to see if they need to keep moving down the stimulus path.”
The statistics bureau said yesterday the unemployment rate climbed in March to a 3 1/2-year high of 5.6 percent after a bigger-than-expected decline in payrolls. A private report showed consumer confidence fell this month for the first time since December, while government figures indicated larger-than- forecast gains in building approvals and retail sales.
‘Room to Cut’
“There’s room to cut should that be necessary,” RBA Assistant Governor Christopher Kent said at the Bloomberg summit. While there are some signs that previous rate reductions are aiding the non-mining parts of the economy, “the peak in resources investment is now close,” Kent said.
“Once it has passed, the decline in mining investment -- and the effect of the still high level of the exchange rate and ongoing fiscal consolidation -- will weigh on economic growth.”
Interest-rate swaps data compiled by Bloomberg show traders see a 64 percent chance the cash rate will drop to at least an all-time low of 2.75 percent by the central bank’s Sept. 3 gathering.
Prime Minister Julia Gillard said her government’s “tight” fiscal stance leaves room for the central bank to cut interest rates.
“I don’t think our current fiscal position in any way reduces the scope” for the RBA to lower borrowing costs, Gillard, 51, said in an interview yesterday in her office in Sydney, the nation’s business capital. “We are keeping a limit on expenditure” and will move to a surplus over time, she said ahead of the May 14 annual budget release.
Even after 1.75 percentage points of cuts since the beginning of November 2011, Australia’s benchmark interest rate remains the highest among major developed economies and compares with a record-low 0.75 percent in the euro zone and near-zero rates in the U.S. and Japan.
Pimco sees little chance of the RBA calling a halt to rate cuts as it expects the economy will weaken because of the strength of the Aussie dollar, the government’s commitment to ending budget deficits and a slowdown in China, the nation’s biggest trading partner.
“As the market flirts with ends of easing cycles, we think that’s representing investment opportunities for Aussie investors and the global investor base,” Mead said.
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