Japanese Housewives Cooling on Aussie Uridashi

Reserve Bank of Australia Governor Glenn Stevens has gone an interest-rate cut too far for Mrs. Watanabe, as Japan’s households look closer to home for returns.

Aussie uridashi sales slumped 71 percent to A$1.8 billion ($1.7 billion) this year, even as A$9.4 billion in such debt matures in 2013, data compiled by Bloomberg show. The currency accounted for 9.8 percent of bonds offered to Japanese individuals this year, compared with 64 percent for yen offerings and a total of 28 percent since 2006. Japanese investors cut Aussie debt holdings by a record 1.7 trillion yen ($17 billion) in the five months through March, Ministry of Finance data show.

Japanese individual investors, a group often nicknamed Mrs. Watanabe because many are housewives, are piling into local assets as unprecedented Bank of Japan monetary easing drives the best equities gains in the developed world. Pacific Investment Management Co. said yesterday Stevens is likely to lower the RBA’s benchmark interest rate again after cutting it on May 7 to a record 2.75 percent. The yield premium benchmark Australian bonds offer over Japan’s touched a half-year low this month.

“What is becoming clear is that Japan is falling out of love with new buying of Australian dollar assets,” Martin Whetton, a Sydney-based interest-rate strategist at Nomura Holdings Inc., wrote in a May 25 e-mail. “If the RBA continues to cut rates, the investment is likely to remain light.”

Smaller Premium

Australia’s 10-year yield fell four basis points to 3.43 percent today. The premium over similar-dated U.S. notes has shrunk 12 basis points this month to 130 basis points and touched 116 on May 28, the narrowest gap since November 2008. The spread to equivalent Japanese government bonds fell to 237 basis points on May 17, the least since Nov. 19, 2012.

The RBA probably will be forced to lower rates again as a record mining boom ends, China growth slows and the government curbs spending to rein in deficits, according to Pimco, which manages the world’s biggest bond fund.

“To stimulate some of the domestic growth candidates like non-mining business investment, household consumption and housing construction, we believe the RBA will need to provide meaningfully easy policy rates,” Adam Bowe and Robert Mead, Sydney-based portfolio managers for Pimco, wrote in a report.

The Aussie bought 96.59 U.S. cents as of 1:36 p.m. in Sydney. It touched 95.28 cents yesterday, the weakest since October 2011.

Nikkei Entices

Yen-denominated uridashi issuance since 2006 has climbed to $80.4 billion, overtaking the $76.5 billion of Aussie debt, data compiled by Bloomberg show. Uridashi are Euro market bonds issued for sale to individual investors in Japan.

Uridashi sales this year totaled $17.9 billion across 13 currencies, the data show. Toyota Motor Corp.’s Australian finance unit led Aussie-denominated sales with a A$219 million offering on Jan. 16 of 3.32 percent securities.

Of the 314 yen-denominated uridashi bonds sold this year, 241 were linked to the Nikkei 225 Stock Average or had a Japanese equity as their underlying security, data compiled by Bloomberg show. The Nikkei soared 33 percent this year. Portfolio investors bought 59.5 billion yen of equity securities in the Japanese currency in March, the most in five years, according to government figures.

Popularity Fades

Aussie-dollar uridashi offerings amounted to $6.1 billion last year, or 14 percent of the total. Issuance in the currency peaked at more than $11 billion in 2010, when it was 28 percent of offerings, according to Bloomberg-compiled figures. In contrast, the proportion of yen-denominated uridashi notes climbed to 55 percent in 2012 from 31 percent two years earlier.

“As a typical high-yielding currency, the Australian dollar had been quite popular among individual investors,” said Toru Suehiro, a Tokyo-based market economist at Mizuho Securities Co. “Now, its popularity is falling in relative terms due to monetary easing by the RBA.”

The Aussie dropped below $1 on May 10 after staying above the level for a record 10 months. It declined 6.7 percent this month, the biggest tumble among the Group of 10 major developed currencies.

The currency’s slump follows the RBA’s decision to reduce the overnight cash rate target to the lowest level in the central bank’s 53-year history. The board “judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy,” Governor Stevens said in a statement on May 7.

Economic Weakness

Data this month signaled the South Pacific nation’s non-mining economy may not be strong enough to withstand an expected crest in resources investment this year. Retail sales unexpectedly declined 0.4 percent in March from the previous month and construction work fell 2 percent in the first quarter, the biggest drop since 2011, government reports showed. The statistics bureau said today capital spending declined 4.7 percent in the three months ended March 31 from the earlier quarter.

The Aussie is also tumbling on signs of a shift in the global outlook. Federal Reserve Chairman Ben S. Bernanke said last week the U.S. central bank may cut the pace of bond purchases at the next few meetings if they see indications of sustained improvement in economic growth. The Fed buys $85 billion of Treasury and mortgage debt a month in a policy known as quantitative easing, which tends to debase the U.S. dollar.

China Concern

In China, Australia’s biggest trading partner, government reports this month showed a slowdown in manufacturing and smaller-than-expected gains in industrial production.

Australian government bonds delivered a 4.4 percent loss to yen-based investors this month, the worst performance other than South Africa among 24 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

“What the RBA has done is amongst other factors such as a softer China, a sense that the U.S. may be stepping back somewhat from its aggressive QE and domestic weakness in Australia,” said Robert Rennie, a Sydney-based chief currency strategist at Westpac Banking Corp. “All those points together have definitely made the Aussie dollar less attractive to Japanese investors.”

Traders see a 24 percent chance Stevens will cut the rate to 2.5 percent next week and are pricing in a 73 percent chance it will be at that level or lower by October, interest-rate swaps data compiled by Bloomberg show.

While Australia’s benchmark borrowing costs remain the highest among advanced economies and compare with near-zero rates in the U.S. and Japan, a decline to 2.5 percent would bring them in line with New Zealand’s rate.

“Since the RBA’s rate cut, outflows from Australian dollar bond funds have increased,” said Yoshisada Ishide, the Tokyo-based manager of the Daiwa SB Short-Term Australian Dollar Bond Open Fund, the biggest fund dedicated to Australia with $8.5 billion in assets. “Investors are selling because they see the Aussie’s yield advantage declining further.”

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