Aussie Bond Romance Stirs as Westpac Says Buying Surges

Investors are rekindling their romance with Australia’s debt markets with a record A$7 billion ($6.3 billion) sovereign sale coming days after Westpac Banking Corp. said fixed-income buying was the strongest in two years.

Offshore investors bought more Australian-dollar securities from Westpac last month than at any time since October 2011 and domestic investors made record corporate debt purchases after adjusting for duration risk, the lender said March 10. More than 70 percent of the world’s 30 largest reserve managers hold Aussie sovereign bonds, according to the Australian Office of Financial Management, the government’s funding arm.

“It’s been a combination of offshore and domestic fund managers coming in to pick up some extra yield, along with continuing interest from sovereign wealth funds, particularly out of Europe,” said Tim Jung, a Sydney-based rates strategist at Westpac. “We’ve seen strong flows into corporate bonds and the long end of the Australian government curve.”

The buying has been helped by a stable Aussie dollar, which is a significant factor for offshore investors, he said.

The local currency, the world’s fifth-most traded, bought 90.21 U.S. cents as of 3:05 p.m. in Sydney, after yesterday adding 0.5 percent. It has averaged 89.29 cents this year after dropping 14 percent in 2013.

Rebalancing Flows

Following a slump early in 2013, offshore interest in government debt rebounded in the second half of the year, statistics bureau data show. Foreigners bought A$12.4 billion of Australian government securities in the fourth quarter and total holdings rose to A$217.4 billion, the most on record, a report March 4 showed. The Aussie slid 4.3 percent in the October-to-December period.

Demand was probably driven by central banks with fixed-weight allocations to the Aussie rebalancing holdings as the currency declined, according to JPMorgan Chase & Co. That signals that large Aussie drops will be met with good demand, the lender said in a March 12 note.

“With the Aussie stable there’s little need to engage in big rebalancing flows,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan. “There is still interest from non-official buyers,” as seen in the large share of offshore investors in the AOFM’s 2026 sale this week, she said. “People are looking at any way to deploy capital, and a 4.25 percent yield on AAA rated paper is still attractive.”

Investor Split

Australia’s 10-year bonds offered a yield of 4.06 percent today, or 2.10 percentage points more than the average for eight other nations that carry the top grade from all three main ratings companies.

Yields climbed 38 basis points over the past year as the Reserve Bank of Australia halted interest-rate cuts that brought its benchmark to a record-low 2.5 percent in August.

Commonwealth Bank of Australia recommended investors buy Australia’s 10-year security against similar maturity U.S. Treasuries, targeting a narrowing in the yield spread to 1.20 percentage points from 1.41 currently, according to an e-mailed research note today. Macro-economic convergence, good demand for Aussie debt and a better outlook for bond supply following this week’s sale will drive a tightening, CBA strategists Alex Stanley and Adam Donaldson wrote in a note to clients.

The April 21, 2026 notes sold March 12 had a coupon of 4.25 percent and priced to yield 4.375 percent, the AOFM said. The debt yielded 4.24 percent today.

Domestic Demand

Domestic investors bought 60.9 percent of the securities sold, while offshore buyers took up 39.1 percent, according to the AOFM. Asian purchasers from outside Japan accounted for 30 percent of the total. Central banks bought 16.6 percent of the transaction, while hedge funds picked up 18.1 percent and fund managers took 23.1 percent. Most of the remainder was purchased by banks for their balance sheets and trading.

The AOFM sold A$800 million of February 2017 bonds today at a bid-to-cover ratio of 4.82, according to an e-mailed statement.

“Domestic investors are quite comfortable with the fact that the RBA is going to be on hold for some time so they can increase duration without the fear of a bear market developing,” said Westpac’s Jung. “Yields are more likely to creep up.”

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