Aussie Debt Gains as U.S., Europe Deter Funds: Australia Credit

The strongest demand at Australian bond auctions in a decade reflects yields in a sweet spot: more stable than those in the U.S. and higher than those in Europe.

A sale of A$500 million ($470 million) in three-year debt this month drew bids for seven times that amount, the most since 2004, government data show. A A$200 million auction of four-year inflation-linked notes was similarly oversubscribed and today’s A$500 million offering of five-month bills went to just two buyers. Australian bonds are the world’s best performers during the past three months, including currency gains.

Reserve Bank of Australia Governor Glenn Stevens has said he plans to keep interest rates on hold as he protects two decades of uninterrupted economic growth. In Europe, which is facing the threat of deflation, bond yields have plunged to records, curbing demand for the securities. Federal Reserve policy makers are considering raising interest rates, fueling speculation Treasury prices will fall.

“The Australian economy is not strong compared to the American economy but not weak compared to the European economy,” said Hideaki Kuriki, a bond trader in Tokyo at Sumitomo Mitsui Trust Asset Management Co. “And the yield level is high,” he said by phone yesterday.

Kuriki said he bought 10-year Australian bonds this month and holds more of the nation’s debt than the percentage in the benchmark he uses to gauge performance. For the U.S., he’s even with the benchmark, while in Europe, he’s overweight but doesn’t plan to buy more, he said. The company oversees the equivalent of $46.7 billion.

Higher Yield

Australian benchmark 10-year notes yielded 3.30 percent as of 12 p.m. in Sydney, falling from 4.24 percent at the end of last year. That compared with yields of 2.35 percent in the U.S. and 0.91 percent in Germany.

Aussie government debt due in more than a year returned 4 percent to U.S. dollar-based investors in the past three months, the best performer out of 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

At an auction of Jan. 23 bills on Aug. 21, a single bidder was aggressive enough to purchase all A$500 million of the securities. Yesterday’s sale for April 2029 bonds drew bids for 3.5 times for securities issued, compared with 2.6 at the previous sale of similar-maturity notes.

Best Performer

Demand for Australian assets has pushed the local currency up 5 percent in 2014, the biggest gain among Group of 10 currencies against the greenback. The Aussie traded at 93.62 U.S. cents in Sydney and touched a three-week high after government data showed investment unexpectedly rose last quarter.

The Reserve Bank reiterated this month the “most prudent course was likely to be a period of stability in interest rates,” according to the minutes of its Aug. 5 policy meeting released on Aug. 19.

The danger is that the Aussie weakens against the U.S. currency as the Fed starts to raise rates, said Wontark Doh, Seoul-based head of overseas fixed-income investment at Samsung Asset Management Co., South Korea’s largest private bond investor, with the equivalent of $122 billion in assets.

“Last year we sold our positions in Australian government bonds,” he said.

If U.S. labor markets keep improving, the Fed may increase borrowing costs sooner than policy makers estimate, Chair Janet Yellen said at Jackson Hole, Wyoming, on Aug. 22. Most Fed officials predict the central bank will start raising rates next year, based on forecasts it published in June.

‘Significant Declines’

ECB President Mario Draghi said at the same meeting that investor expectations for inflation in the euro area have “exhibited significant declines,” fueling speculation that he is preparing to buy debt to bring down borrowing costs. He previously said a worsening of the medium-term outlook would provide a reason for broad-based asset purchases.

The RBA’s Stevens said last week spurring the economy requires “animal spirits” that policy makers can’t trigger, bolstering expectations he plans to keep the benchmark rate unchanged at a record low of 2.5 percent.

Traders are pricing in 21 basis points of interest-rate increases in the U.S. during the coming year, according to swaps data compiled by Credit Suisse Group AG. They’re expecting seven basis points of cuts in Australia, the data show. A basis point is 0.01 percentage point.

“The Aussie’s performed much better because Stevens’ commentary has shied away from any indications that the RBA is going to cut rates,” Sean Keane, an Auckland-based analyst at Triple T Consulting and the former head of Asia Pacific rates trading at Credit Suisse, said by phone on Aug. 26. “There’s still not a huge amount of supply of Australian bonds, so they look pretty good relative to other options.”

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