Aussie Bond Yields Are in a Global Race to the Bottom

  • Big pressure to find yield a `global phenomenon,' Mizuho says
  • Average global bond yield dropped to record 1.28% last week

Australian bond yields, caught in a global race to the bottom, are poised fall to a record this quarter if they sustain 2016’s pace of declines.

The nation’s benchmark 10-year yield of 2.47 percent is approaching the all-time low 2.25 percent set in February 2015, after tumbling almost 40 basis points in the first three months of 2016. Demand is spreading to the rest of Australia’s long-term securities, cutting the premium investors earn for holding 15-year bonds over five-year securities to 61 basis points last week, the smallest amount in 14 months.

“Investors are seeking higher yields, and there’s big pressure to find them in longer maturities,” said Yusuke Ito, the senior investor in Tokyo for Mizuho Asset Management, which oversees about $45.3 billion. “Australia is definitely a destination. The yield is quite high for advanced economies. It’s a global phenomenon.” Ten-year yields will fall toward 2 percent by the end of December, he said.

Australian and U.S. bonds are drawing demand from investors seeking alternatives to negative yields in Japan and Europe. The rush to higher-paying alternatives sent yields worldwide to a record low of 1.28 percent last week, based on the Bank of America Corp. Global Broad Market Index, which has almost 20 years of data.

Job Report

Aussie government securities fell Tuesday after an industry report showed business confidence jumped and an employment gauge in the survey surged to the highest level in almost five years. The 10-year note yield climbed five basis points, the most in a month.

Aussie government debt has returned 2.8 percent this year, Bloomberg World Bond Indexes show. Treasuries have gained 3.6 percent as benchmark U.S. 10-year yields have dropped to 1.74 percent from 2.27 percent.

German 10-year bonds yield 0.11 percent and Japan’s minus 0.095 percent, after central banks in both regions introduced negative interest rates to spur growth. About a third of the world’s developed-market sovereign debt has negative yields, according to data compiled by Bloomberg.

‘Little Higher’

Australian yields also made a run toward the record low at the end of February, and didn’t make it. Bill Bovingdon, the chief investment officer at Altius Asset Management in Sydney, expects a repeat performance.

“There isn’t a lot of attraction in going out 10 years with rates where they are,” said Bovingdon, who has 30 years of experience in fixed income. “Over the next few months, we think rates will be a little higher.”

The Federal Reserve will be to blame, Bovingdon said. U.S. policy makers will probably refrain from raising interest rates to let the economy and inflation speed up, he said. “Who gets punished if inflation is allowed to run away a little? It’s always bondholders.”

U.S. Treasuries and Australian government securities due in 10 years and more move together almost 90 percent of the time, according to data compiled by Bloomberg.

While Fed officials debate when to raise U.S. rates, Reserve Bank of Australia Governor Glenn Stevens says there’s room to cut in his nation, another plus for its bonds. Stevens reaffirmed last week he’s prepared to lower rates if needed

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE