Gundlach’s Baby Boomer Bulls Cap Aussie Yields: Australia CreditWes Goodman
Jeffrey Gundlach’s prediction that retiring baby boomers will hold down U.S. Treasury yields is being echoed in Australia’s sovereign bond market.
The postwar bulge in Australian births occurred from 1946 to 1961, according to the government, so the earliest offspring turn 68 this year. People 65 years and older will comprise 22 percent of the population in 2061, versus 14 percent in 2012, the Bureau of Statistics estimates using current trends. The shift can slow the economy as the workforce shrinks and retirees seek safety in government debt instead of equities or property.
“We’ve got the same situation as the U.S.,” said Roger Bridges, the head of fixed income in Sydney at Tyndall Investment Management Ltd., which oversees the equivalent of $21.2 billion. “It’s a general headwind for economies going forward. People expecting a massive selloff in bonds will not get it.”
Bond markets in both the U.S. and Australia have rallied this year even as the pace of economic growth has allowed the Federal Reserve to trim its bond purchases and the Reserve Bank of Australia to stop cutting interest rates. Gundlach, who oversees more than $47 billion as the co-founder and chief executive officer of DoubleLine Capital LP, said the demographic shift will help keep benchmark U.S. yields down for years.
Australian government bonds have gained 3.6 percent this year and Treasuries advanced 3.3 percent, based on Bloomberg World Bond Indexes. Ten-year yields in the South Pacific nation have fallen to 3.71 percent from 4.24 percent at the end of 2013 and touched 3.65 percent on May 21, the least since Aug. 6. The currency has advanced 3.8 percent in 2014, after tumbling 14 percent in 2013, to trade at 92.57 U.S. cents as of 12:36 p.m. in Sydney.
The bond rally surprised economists, who began 2014 predicting the yield would rise to 4.64 percent by Dec. 31, based on Bloomberg surveys. The latest projection is still for an increase to 4.52 percent.
Gundlach, the fixed-income manager whose mutual fund beat 97 percent of its rivals the past three years, said the aging population is going to keep U.S. yields from surging higher, in an interview this month with Bloomberg’s Tom Keene.
Benchmark U.S. 10-year yields have fallen to 2.51 percent from 3.03 percent at the close of last year.
Australian and U.S. bonds move together, with a correlation of 0.87 for securities due in 10 years and longer, according to data compiled by Bloomberg. A figure of 1 means they move in tandem.
Bond yields have fallen even as a Bloomberg survey of banks and securities companies projects Australia’s economic growth will quicken to 2.8 percent this year from 2.43 percent in 2013.
The Reserve Bank of Australia fostered both the debt-market rally and the economy by cutting its main interest rate to a record low of 2.5 percent last year and keeping it there. Governor Glenn Stevens said this month that a period of stable interest rates was likely “the most prudent course.”
One result has been a surge in the nation’s housing market, spurring a record monthly advance in home prices for capital cities in March.
The opposite will happen in the coming years as baby boomers retire, said Catherine Cashmore, a real estate agent and analyst in Melbourne who writes about property for the Macro Business website. Aging boomers hold about 50 percent of Australia’s real-estate wealth, she said in a telephone interview May 23.
“The fear has been that we’re going to have a tsunami of people that are downsizing,” Cashmore said. “If current policy continues, the risk of a housing crash is inevitable. At some point prices will get too high for productivity to be able to sustain it.”
A growing elderly population means increasing demand for investments that will see people through their retirement.
“Australian bond yields will not rise in any meaningful way in this environment,” Anne Anderson, the Sydney-based head of fixed income for Asia Pacific at UBS Global Asset Management, wrote in a May 26 e-mail. “Cyclically they may rise as the economy improves and inflation edges higher. Longer term these structural influences suggest that bond yields will be somewhat lower than in previous cycles.” UBS manages the equivalent of $35.1 billion in Australia.