Foreigners Trim Aussie Bond Holdings to Least Since 2010

Foreigners’ holdings of Australian government securities fell to the lowest proportion of the total in 2 1/2 years, as an improving global outlook damped demand for the safety of the top-rated debt.

Offshore holdings declined to 68.9 percent of total outstanding debt as of March 31, down from 70 percent three months earlier and the least since the third quarter of 2010, according to government data compiled by Bloomberg. Non-residents owned A$206.4 billion ($200.8 billion) worth of government bonds and bills, down from A$207 billion at the end of the prior quarter.

Australian government bonds fell for a second quarter in the three months ended March 31, the first back-to-back declines since the first half of 2009. Foreign holdings of the nation’s debt peaked at a record 77 percent in June 2012, up from 59 five years earlier, boosted by purchases from foreign central banks.

“The magnitude of those flows are a lot less than they perhaps were a couple of years ago,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “That’s consistent with this idea that central banks have moved from the build-up phase of their portfolio in Aussie bonds to a maintenance phase.”

Offshore demand for Australian government securities remains strong, with foreign central banks holding notes across the yield curve, Rob Nicholl, head of the Australian Office of Financial Management, said today in Sydney.

Price Declines

Offshore investors bought a net A$2.2 billion of Australian securities, while price declines reduced the value of their stakes by A$2.9 billion, according to data from the Australian Bureau of Statistics released today.

Foreign holdings of sovereign notes with maturities longer than a year fell to A$199.6 billion last quarter, from A$200.1 billion on Dec. 31. The total value of bonds outstanding rose to A$282.4 billion from A$274.4 billion, according to the Australian Office of Financial Management.

Offshore investment in government bills fell to A$6.8 billion from A$7.0 billion, as the pool of such debt shrank to A$16.9 billion from A$21.4 billion.

Japanese Money

Japanese investors sold a net 1.2 trillion yen ($12 billion) of Australian securities in the six months ended March 31, the biggest sales after the U.S., according to data from the Tokyo-based Ministry of Finance. The sales came as Prime Minister Shinzo Abe’s policies helped weaken the yen and drove up stock prices in the world’s third-biggest economy.

Those outflows may have started reversing, according to Westpac Banking Corp. Japanese investors were net buyers of Australian bonds in May for the first time this year, the Sydney-based company said today, citing data compiled from flows it manages.

“Our own flows give us some reason to believe that the worst of the currency-related selling may in fact be over,” Westpac analysts Damien McColough and Timothy Jung wrote in a report.

Japanese interest was tilted toward longer-dated notes, with purchases of securities maturing in 10 years or more dominating, Westpac said. They were net buyers of notes due in more than five years, and net sellers of shorter-term securities.

Sovereign Investors

Interest from sovereign investors in Australian bonds surged again in May, especially from Asia, according to McColough and Jung. While there were flows across various maturities, the data indicate a preference for bonds due in 10 years or more, Westpac said. The A$4 billion sale by the federal government of a new 2025 bond helped spur interest, the analysts wrote.

The Aussie traded at 97.10 U.S. cents as of 1:50 p.m. in Sydney, after reaching 95.82 cents on May 29, the weakest level since October 2011.

Australia’s benchmark 10-year yield has risen this year by 14 basis points, or 0.14 percentage point, to 3.42 percent. Australian government notes handed investors a 0.1 percent loss in the first quarter after dropping by 0.6 percent in the final three months of 2012, according to Bank of America Merrill Lynch data.

Before it's here, it's on the Bloomberg Terminal.