Record Aussie Bond Sales Prompt NAB's Jolly to Ask Who Will Buyby
Australia plans record A$86 billion in long-term debt sales
Bloomberg survey projects six-year bond rally under threat
Australia is preparing to ramp up debt sales to the most on record just as waning global appetite threatens to curtail a six-year, 45 percent rally.
Investors begin 2016 facing an unprecedented amount of supply after the government announced in December it plans to increase bond issuance to about A$86 billion ($61.3 billion) for the financial year that will end June 30, versus the A$74 billion it projected in May. Investors in the nation’s government debt market will just about break even in 2016, based on a Bloomberg survey of economists.
While U.S. Federal Reserve tightening threatens all global bonds, Australia faces its own challenges as a rout in commodity prices and slowing growth in China weaken the Aussie dollar. The South Pacific nation’s yield advantage has been eroded by 10 interest-rate cuts in four years, and falling reserves have left central banks with less scope for investing abroad. Auction demand is waning along with overseas ownership of the nation’s debt.
“Who’s going to buy all these big bonds?” said Peter Jolly, head of market research at National Australia Bank Ltd., the nation’s biggest lender by assets. “Between 2008 and 2013 there was a lot of foreign interest to buy Australia. We know that a significant portion of that was central banks allocating. There’s not a lot of new demand from that source.”
Australia’s 10-year bond yielded 2.78 percent as of 3:22 p.m. in Sydney, meaning investors can pick up an extra 55 basis points buying the securities instead of similar-maturity Treasuries.
The Aussie sovereign debt market returned 2.5 percent in 2015, more than double the 0.8 percent gain for U.S. Treasuries, based on Bank of America Corp. data. The only time the smaller nation’s debt fell in the past 16 years was a 2.7 percent decline in 2009, the figures show.
There are signs appetite for the debt is waning.
Demand at Australian bond auctions dropped last year to the weakest since 2002. The average bid-to-cover ratio was 3.2, down from 4 in 2014, the biggest decline in nine years.
Investors from outside the nation hold about 64 percent of the debt, the smallest amount in six years.
Reserves held by the 10 emerging nations with the largest currency stockpiles fell in November to the lowest level since March 2013, according to data compiled by Bloomberg, meaning they have less cash to funnel into government bond markets.
Australia’s dollar weakened 11 percent in 2015. It was the third year of losses, the longest run of declines since the period ended in 1993. Iron ore, the nation’s biggest export, dropped almost 40 percent.
Fed officials have indicated they may raise their benchmark in four quarter-point steps in 2016, after making their first increase in almost a decade in December. Rising U.S. yields would tend to send Australia’s higher because securities due in 10 years and longer in the two nations have a correlation of 0.886. A figure of 1 would mean they move in lock step.
Aussie bonds are still worth buying, said Toshifumi Sugimoto, chief investment officer at Capital Asset Management in Tokyo. Slowing economic growth in China will limit demand for Australia’s commodity exports, he said.
“More supply isn’t good, but commodity prices will be quite low this year,” Sugimoto said. “We will see more China risk. I don’t see bond yields going much higher.”
Capital Asset holds more Australian sovereign debt and state bonds, including those of Queensland and New South Wales, than the proportions in the benchmark it uses to gauge performance, he said.
Trading in China’s CSI 300 Index of shares was halted Monday after the gauge slumped 7 percent, and investors pushed equity prices down around the world.
For Australian debt, the consensus among economists is that the best days of the rally are over. Ten-year yields will rise to 3.15 percent by year-end, according to Bloomberg surveys with the most recent forecasts given the heaviest weightings. The result would be a little changed year for investors as coupon payments offset price declines, according to data compiled by Bloomberg.