Photographer: Brendon Thorne/Bloomberg

Longest Aussie Bonds Make Twice as Much as Yields Drop to Record

  • Bonds due in more than 10 years have gained 7.9% this year
  • Yield on 10-year bond fell to a fresh record on Monday

Australian bond investors willing to lend for longer made twice as much as peers who bought shorter maturities as fragile global growth sent yields tumbling to record lows.

Securities due in 10 years or more gained 7.9 percent in 2016, compared with 3.3 percent for notes due in less than a decade, the Bloomberg AusBond Composite Index showed as of Monday. Notes from Victoria and Queensland state governments due in the 2030s are among the best-performing individual bonds, along with long-dated federal government paper. Some of the strongest gains among non-financial companies have come from Melbourne Airport, Australian National University and Asciano Ltd.

The benchmark 10-year yield dropped to an unprecedented 2.20 percent on Monday as disappointing Chinese economic data added impetus to a bond rally that’s been fueled by the prospect of further Reserve Bank of Australia stimulus following its decision to cut the cash rate to 1.75 percent this month. The central bank said in minutes of the meeting released Tuesday that a “broad-based” weakening of inflation pressures helped persuade it to cut and the swaps market is now pricing in about 34 basis points of additional easing in the coming year.

Hunt for Yield

“Right now, the momentum more clearly has been for bond yields to head lower and, because Australia’s just freshly had this change in policy from the RBA, then that’s given our bonds further support,” said Nick Bishop, the head of fixed income in Sydney at Aberdeen Asset Management. “More recently, you’ve had the RBA driving the front end, but I think the long-end themes have probably been in place for 18, 24 months. What we mean is that, globally, there are fewer places in developed markets where you can get any type of half decent yield.”

The following charts highlight the outperformance of the longest-tenor Aussie bonds as benchmark yields fall to unprecedented levels.

CHART 1: Bonds due in 20 years or longer have provided a return of 9.3 percent since Dec. 31, while those in the range below five years have delivered on average less than a quarter of that.

CHART 2: The 10-year yield on Monday broke through the previous record low set in February 2015 and was at 2.29 percent as of 12 p.m. on Tuesday in Sydney.

CHART 3: State and federal notes due in more than 12 years have been the standout performers from government issuers.

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