Goldman Manager Sees Aussie Yield Grab: Australia Credit

Offshore buying that helped push Australia’s 10-year bond yield to its lowest in 13 months and spurred the developed world’s biggest currency gain shows no sign of abating, according to Goldman Sachs Asset Management.

The rate on the nation’s benchmark note will drop toward 3 percent and the Aussie may climb above 95 U.S. cents as unprecedented stimulus from the Bank of Japan and European Central Bank drives a search for yield, Philip Moffitt, head of fixed income for Asia-Pacific at Goldman Sachs AM, said yesterday. Australian bond prices will also rise as the Reserve Bank moves closer to cutting interest rates, he said.

“Big sources of capital, big current-account surplus places like Japan and Europe are going to be looking for places to deploy” funds as long as ECB and BOJ rates remain low, Moffitt said in an interview in Sydney. “In the face of that stronger demand the currency continues to stay firm, even strengthens, and that forces the Reserve’s hand.”

Local bond prices and the Aussie have defied forecasts for declines this year, surging as monetary policies in Japan and Europe add to already abundant global liquidity. Australia’s 10-year yield is 1.8 percentage points higher on average than seven other nations that hold stable AAA ratings from the three main credit assessors.

The debt will partly disconnect from U.S. Treasuries as the Reserve Bank of Australia moves closer to cutting its record-low benchmark rate while the Federal Reserve approaches its first increase since 2006, Moffitt said.

Rapid Readjustment

Goldman Sachs AM invests or advises on assets worth more than $900 billion, according to its website.

Traders this month moved to price no change in the RBA’s cash rate over 12 months after predicting about a quarter-percentage-point increase in April, according to a Credit Suisse Group AG index. There is a 49 percent chance that the fed funds rate will be raised to at least 0.5 percent by June, according to futures pricing.

The median forecast of 32 economists surveyed by Bloomberg News this month is for the RBA to leave its benchmark unchanged for the rest of this year.

The central bank will be pushed to lower rates as the domestic non-mining economy sputters, weighed down by a strong currency, and inflation remains subdued, Moffitt said.

“I’m sure they don’t see the need to change policy settings, but the currency’s kind of got them in a corner,” he said. The RBA either hopes for a Fed move to weaken the Aussie or “you send a signal” and “get a rapid readjustment.”

The cash rate in Australia at 2.5 percent compares with near-zero in the U.S., Europe and Japan, which have all added to monetary easing with unconventional programs that support their bond markets and drive down yields.

AAA Affirmed

Australia’s 10-year bond yield was at 3.47 percent as of 1:01 p.m. in Sydney and will move to 4.16 percent by Dec. 31 according to a weighted average of analyst forecasts compiled by Bloomberg. Strategists in a survey at the end of last year predicted it would be at 4.4 percent by June 30.

The comparable rates were 2.49 percent in the U.S., 1.15 percent in Germany and 0.525 percent in Japan.

Standard & Poor’s today affirmed its AAA rating for Australia with a stable outlook, citing strong institutional settings, the nation’s resilient economy, and a high degree of monetary and fiscal policy flexibility.

An auction of February 2022 inflation-linked bonds received offers for 6.62 times the A$100 million on sale, the best bid-to-cover ratio in a year for indexed debt, according to data from the Australian Office of Financial Management.

The Australian dollar traded at 93.96 U.S. cents and has climbed 5.4 percent this year, the biggest gain among Group of 10 currency nations. Late last year, forecasters said it would sink to 88 cents by June 30.

Investors Comfortable

The Aussie has advanced 7.8 percent to A$1.42997 per euro this year and 2 percent to 95.73 yen, also beating G-10 currency peers.

Australia’s 10-year yield “is quite attractive by global standards,” said Moffitt. “Most investors globally are looking, their investment pattern is one that’s motivated by momentum and so while the currency’s stable or rising they feel comfortable owning it.”

Investors aren’t just interested in sovereign bonds, they are looking at Aussie-dollar exposure through corporate credit, hybrids and high-yield stocks, he said.

Japanese money managers purchased more than 1 trillion yen ($9.8 billion) of Aussie dollar-denominated debt over the five months through May, official data from the Asian nation show.

Hard Market

Offshore investors increased holdings of Australian state bonds to 28.8 percent of the outstanding in the first quarter, up from 27.3 percent in the previous three-month period, the most recent Australian figures show.

While Moffitt sees shorter-term Australian notes rallying and is also betting on lower yields in “core” European countries such as Germany, he is less enthusiastic about prospects for government debt in the U.S. and Japan. He has taken short positions in both markets, ones that would benefit if the assets decline.

The manager has also pared investments in corporate credit securities, anticipating potential market dislocations that might provide opportunities to buy the paper more cheaply, Moffitt said. He sees junk-rated bonds as “ relatively reasonably valued,” while investment-grade credit is “pretty fully priced.”

“There’s actually not that much in fixed income that really looks compelling,” he said. “Right now it’s hard to find parts of the market that really stand out.”

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