Mom & Pop Bond-Buying Aided as Stocks Beaten: Australia Credit

Australia’s government is easing rules to encourage pension savers to boost corporate bond holdings, after the securities returned three times as much as stocks in the past decade when adjusted for price swings.

Borrowers selling notes to individual investors will be able to use a shorter prospectus while company directors won’t face civil liabilities for mis-statements, according to draft legislation Treasury released Jan. 11. The changes are designed to help the nation’s A$1.4 trillion ($1.5 trillion) retirement savings industry buy more bonds and cut Australian companies’ reliance on offshore debt markets, according to the statement.

The nation’s pension funds have about half their assets in stocks, the most among 29 nations tracked by the Organization for Economic Cooperation and Development, and the lowest stake in bills and bonds after South Korea, a September report showed. That’s limited their share of Australian corporate bonds’ 34 percent risk-adjusted gains in the past decade, data compiled by Bloomberg show. They beat the 16 percent increase for global peers and the 9.7 percent advance on local stocks.

“Investors are looking for low-volatility assets such as bonds to fund retirement,” said Andrew Gordon, director of fixed-income origination at FIIG Securities Ltd. in Sydney. “The government wants to allow investors access to a broader array of fixed-income products, and give companies access to the large pool of superannuation capital to domestically fund borrowings.”

Offshore sales

Australian issuers, led by the nation’s banks, raised $70.7 billion last year from debt denominated in currencies other than the local dollar, according to data compiled by Bloomberg.

Non-financial companies typically tap banks for funds, with $83.6 billion of loans signed in the country last year, data compiled by Bloomberg show. That compares with A$14.3 billion of domestic bond sales by companies outside the finance industry.

Australian pension funds reduced the portion of investments in bills and bonds by 2.5 percentage points in the decade to 2011, the OECD report showed. They increased that for stocks by 7.8 percentage points.

Superannuation funds, as the investments are known in Australia, increased their assets to A$1.4 trillion as of June 30, rising 3.7 percent from a year earlier. Self-managed superannuation funds, which have less than five members and are typically an individual or family saving for retirement, accounted for A$439 billion of that, regulatory data show.

Receptive Environment

“It is important for the Australian debt market to provide a facilitative and receptive environment to accommodate the growing needs of companies and investors,” the Australian Financial Markets Association said in an e-mailed statement on Jan. 11. “Promoting a deep and liquid domestic corporate bond market depends on a range of factors and the government’s proposals will advance this cause.”

Australian stocks have provided higher returns than bonds when risk isn’t taken into account, gaining 140 percent in the 10 years to the end of 2012 including reinvested dividends. That compares with a 97 percent total return on corporate bonds, Bank of America Merrill Lynch data show.

Still, the benchmark S&P/ASX 200 index has declined in three of the past five years, falling 41 percent in 2008 amid the global credit freeze. It rallied 31 percent the next year.

Risk-adjusted returns are calculated by dividing total returns by volatility, or the degree of price variation, giving a measure of income per unit of risk. Higher volatility means the price of an asset can swing more dramatically, increasing the potential for unexpected losses.

Term Deposits

Investors have responded to the price swings on the Australian stock market by piling into term deposits. Such investments swelled to a record A$545.6 billion in August 2012, according to central bank data.

They fell to A$538.7 billion in November, as central-bank rate cuts reduced the attractiveness of such holdings and the equities market gained.

The Reserve Bank cut its benchmark by 1.75 percentage points since the beginning of November 2011 to bolster the economy against slowing global growth and a fading mining boom.

Swap contracts show a 36 percent chance the RBA will lower the overnight cash-rate target to a record 2.75 percent next month, after a 0.25 percentage point cut to 3 percent on Dec. 4.

Yields on 10-year government bonds have risen 18 basis points, or 0.18 percentage point, since Dec. 31 to 3.45 percent as of 1:07 p.m. in Sydney. The securities offer 158 basis points more yield than similar-maturity U.S. Treasuries.

Global Demand

The Australian dollar climbed 1.5 percent this year to $1.0546. Demand for assets in the so-called Aussie spurred foreign holdings of government bonds to a record last year. SK Telecom Co., a South Korean phone company, raised A$300 million last week selling Australian-dollar notes, data compiled by Bloomberg show.

Even so, Australian companies with large cash needs have tended to seek funds in U.S. and European markets. BHP Billiton Ltd. raised a record $14.2 billion from bonds in 2012 at borrowing costs as low as 1 percent, more than 90 percent of which came from markets other than Australia, Bloomberg-compiled data show. Its A$1 billion local sale in October was the company’s first in more than a decade.

“Domestic corporates and banks often go to offshore debt markets because they can get bigger size, longer tenor and better execution certainty,” said James Hayes, head of fixed income in Sydney at BNP Paribas SA. “I’m not sure the change in legislation is the magic bullet to building a deeper domestic corporate bond market.”

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