Japanese Investors Returning to Australian Bonds, Westpac Says

Japanese investors were net buyers of Australian bonds in May for the first time this year, Westpac Banking Corp. said, citing data compiled from flows it manages.

Westpac’s data show investors from Japan made the biggest net purchases since August, analysts Damien McColough and Timothy Jung wrote in a report today. State government bonds were the main assets bought, followed by federal government securities and notes issued by foreign sovereign-backed borrowers, they wrote.

Japanese fund managers were net sellers of Aussie bonds over the six months to March 31 as new policies implemented by Prime Minister Shinzo Abe helped weaken the yen and buoy yields in the world’s third-biggest economy. Benchmark rate cuts by the Reserve Bank of Australia also reduced the relative attractiveness of the nation’s assets, driving the Aussie dollar down 7.7 percent in May, its biggest drop 20 months.

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

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 ($3.9 billion) sale by the federal government of a new 2025 bond helped spur interest, the analysts wrote.

The Aussie traded at 97.53 U.S. cents as of 10:27 a.m. in Sydney, after reaching 95.82 cents on May 29, the weakest level since October 2011.

Fund managers from the world’s third-biggest economy sold a net 1.2 trillion yen ($11.7 billion) of Australian securities in the six months ended March 31, the biggest sales after the U.S. in Japan’s Ministry of Finance data. They snapped up 2 trillion yen of French bonds and 200 billion yen of Mexican securities over the same period.

Foreign investors cut their investments in Australian government securities at the end of 2012 to the lowest level in almost two years, as an improving global outlook damped demand for the safety of the top-rated debt.

Offshore buyers held 70 percent of total outstanding securities as of Dec. 31, the least since March 2011, according to government data compiled by Bloomberg. Non-residents owned A$207 billion of government bonds and bills, down from A$208.3 billion at the end of the third quarter. Total outstanding debt rose to A$295.8 billion from A$287.5 billion.

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