This $40 Billion Fund Beat Aussie Debt Analysts for Second Year

  • Mizuho's Ito Sees 10-Year Yield Falling to 2.4% by year-end
  • Economists have spent 2015 warning bond yields would rise

The fund manager who defied economists by betting on Australian bonds in 2014 -- and then benefited from 2014’s biggest rally in three years -- is giving a repeat performance in 2015.  

Yusuke Ito, a senior portfolio manager in Tokyo at Mizuho Asset Management, which has more than $40 billion in assets, says a stagnating economy will ensure demand for the relative safety of the nation’s sovereign debt. Mizuho favors 20-year bonds because the longest maturities gain most in a rally, he said.

Ito’s stance puts him at odds with most analysts who spent much of 2015 saying Australian yields were poised to rise as the economy recovers from a slowdown in Chinese demand. He’s challenging the consensus again, saying 10-year yields will fall to 2.4 percent by year-end from 2.59 percent on Monday in Sydney. A Bloomberg survey of economists projects an increase to 2.74 percent.

“Looking at any number of statistics, there’s no sign that the Australian economy is accelerating,” Ito said. “I don’t think that’s going to change soon. We’re overweight.”

His strategy of favoring long-term securities has proven to be beneficial.

At the start of 2014, economists projected a year-end benchmark yield of 4.5 percent. It ended at 2.74 percent and the market returned 10 percent in its biggest rally since 2011.

The same thing is happening in 2015. Analysts predicted in January that the yield would climb to 3.3 percent by the end of the third quarter, though it has yet to reach that level. Bonds have returned 3 percent so far this year.

Weaker Aussie

Hideaki Kuriki, a portfolio manager at Sumitomo Mitsui Trust Asset Management, said Australian 10-year yields won’t be able to decline past 2.5 percent.

The economy will reap the benefits of a weaker currency, he said. The Aussie has tumbled 17 percent in the past 12 months as the economic outlook has worsened and the Reserve Bank of Australia cut interest rates twice. In his recent monthly policy statements, central bank Governor Glenn Stevens has dropped language from earlier in the year seeking a weaker Aussie and has signaled a reluctance to add additional stimulus.

“The RBA won’t cut interest rates” again, Kuriki said. Tokyo-based Sumitomo Mitsui Trust oversees $56 billion. “The Australian dollar has fallen, and the RBA thinks that’s enough to support the economy.”

Investors from outside Australia own about 65 percent of the nation’s debt, according to the Australian Office of Financial Management.

Job Losses

The latest hiccup for the economy came last week when the government reported the nation lost 5,100 jobs in August, signaling record-low interest rates haven’t been enough to offset four straight quarters of declining mining investment. A Bloomberg of survey of economists projected a 9,600 gain.

Australia’s housing market may be starting to slow, the central bank said in a report last week.

The fourth quarter may be a time for overseas investors to buy the nation’s bonds, based on Ito’s outlook for stability in the Australian dollar. The currency selloff will probably stop for a while, he said.

“The Australian dollar has collapsed,” he said. “The pace might have been a little too drastic. There’s a possibility the Australia dollar could have bottomed.”

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