Butterfly at 10-Month High as RBA Fuels Australia GrowthWes Goodman and Kristine Aquino
Australian bond investors are betting the central bank can spur economic growth without losing control of inflation, pushing five-year yields to the highest level relative to short- and long-term bonds in 10 months.
The so-called butterfly spread derived by measuring differences between the two-, five- and 10-year rates was a negative 29 basis points yesterday, the highest since March, and up from last year’s low of negative 64 basis points in September. Germany is showing a similar pattern, with the spread rising since Dec. 31 by the most in four months.
Daiwa SB Investments Ltd. is favoring shorter-term bonds most sensitive to the Reserve Bank of Australia’s interest rate, as the swap market shows an 83 percent chance of a cut by June 30. Diam Co. recommends longer-dated debt as consumer prices hold in the central bank’s target band of 2 percent to 3 percent. Mitsubishi UFJ Asset Management Co. disagrees, saying the higher five-year yields are now attractive.
“There is some value in the very short end and the longer end of the market, but I’m bearish overall,” said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB, which manages the equivalent of $55.8 billion and is a unit of Japan’s second-largest brokerage. “The economy is healthier than other major developed countries.” Daiwa SB favors two- to three-year securities, he said.
Australian five-year yields climbed to 3.01 percent on Jan. 11, the highest close since May. The bonds offered 2.23 percentage points more than same-maturity Treasuries on Jan. 14, also an eight-month high.
Government debt has handed investors losses of 0.3 percent in Australia, 1.2 percent in Germany and 0.3 percent in the U.S. this year, according to Bank of America Merrill Lynch indexes.
RBA Governor Glenn Stevens reduced the target for overnight lending to 3 percent on Dec. 4, matching a half-century low. The inflation outlook amid a softer job market afforded policy makers scope to lower borrowing costs, the bank said in the minutes of its decision.
Australia’s economy expanded 3.1 percent in the third quarter from a year earlier, versus 1.8 percent worldwide, according to data compiled by Bloomberg. At the same time, China, the biggest buyer of Australia’s iron ore and coal exports, is stabilizing.
China’s economic growth quickened to 7.8 percent in the fourth quarter from 7.4 percent in the third, based on a Bloomberg News survey of economists before the government reports the figure tomorrow. It would be the first increase since the last three months of 2010.
Iron ore prices at Tianjin rallied to $158.50 per metric ton last week, the highest in 15 months.
Non-mining parts of the Australian economy are showing signs of weakness, keeping the chance of another rate cut alive.
Employers cut 5,500 jobs in December and the jobless rate rose, a government report today showed, versus the median estimate for a 4,000 increase in a Bloomberg News survey of 27 economists.
The Australian dollar fell 0.2 percent to $1.0552 as of 12:25 p.m. in Sydney. It is up 1.5 percent against the U.S. currency this month, according to data compiled by Bloomberg.
Diam Co. prefers Australian debt due in 10 years or longer to capture higher yields, while betting that consumer prices will be held in check.
“Inflation will be very stable for the time being,” said Hideya Kubo, a senior money manager for the company in Tokyo, helping oversee the equivalent of $117 billion at the unit of Dai-ichi Life Insurance Co., Japan’s second-biggest life insurer.
The difference between yields on 10-year notes and same-maturity inflation linked-notes, a gauge of trader expectations for consumer prices over the life of the debt, was 2.70 percentage points. The average over the past three years is 2.71 percentage points.
For Hideo Shimomura at Mitsubishi UFJ, the rise in five-year yields has made them more appealing.
“I like five years,” said Shimomura, who helps oversee the equivalent of $68 billion at the unit of Japan’s largest publicly traded bank. “Looking at the butterfly spread, they’re quite attractive.” Shimomura said he’s considering switching some money from 10-year debt into five-year securities.
Germany’s butterfly spread climbed to negative 45 basis points on Jan. 10 from negative 73 basis points Dec. 31. European Central Bank President Mario Draghi this month expressed optimism that the 17-nation euro economy will return to health, helping send bond yields higher.
The ECB cut its main interest rate to a record low of 0.75 percent last year, anchoring short-term rates. Of 39 economists surveyed by Bloomberg News, 17 predict the ECB will reduce its key lending rate to 0.5 percent by mid-year.
Yields show traders expect 1.69 percent inflation in Germany for the next decade, helping maintain demand for long-term bonds.
The opposite is happening in Japan. The butterfly spread measuring three-, five- and 30-year yields fell to negative 179 basis points this month, a record low based on Bloomberg data that began in 2006.
The Bank of Japan has reduced its interest rate to zero, limiting demand for shorter securities as there’s no more room to cut. Prime Minister Shinzo Abe is pushing the central bank to double its inflation goal to 2 percent, curtailing appetite for long bonds.
In Australia, five-year notes are “fragile,” said Chungkeun Oh, who invests in the nation’s bonds for Industrial Bank of Korea, South Korea’s largest lender to small- and medium-sized companies.
“I’m bearish on the market,” Oh said. “Typically when yields rise, the hump rises faster than the short end or long end” along the spectrum of maturities, he said.