Aussie Bonds Set to Lose Highest-Yielding AAA Spot to Singapore

  • Yields have tumbled this year, driven by slowing inflation
  • Futures suggest RBA will cut interest rates again this year

Australia will lose its place as the highest-yielding AAA bond market to Singapore if the South Pacific market’s rally sustains its current pace.

Aussie 10-year yields have tumbled almost 60 basis points this year, driven by a weaker-than-expected inflation report that prompted the central bank to cut interest rates this month. The yield has dropped to 2.31 percent, approaching Singapore’s level of 2.12 percent.

The reasons to buy bonds in Australia are growing. Futures contracts indicate the Reserve Bank will reduce its benchmark at least once more this year as it seeks to support an economy that’s suffering from a downturn in China, the biggest consumer of Australia’s exports. Wages are growing at the slowest pace on record, while the Reserve Bank cut its inflation forecast this month.

“The yields may converge,” said Hideo Shimomura, the chief fund investor at Mitsubishi UFJ Kokusai Asset Management in Tokyo, which oversees about $106 billion. “Australian yields will fall, mainly on the inflation story. Singapore is getting more attractive, but definitely for this year, Australian is better.”

Highest Yields

The two countries have the highest yields among the 10 nations that have AAA ranks from Moody’s Investors Service, S&P Global Ratings and Fitch Ratings. The other countries are Canada, Denmark, Germany, Luxembourg, the Netherlands, Norway, Sweden and Switzerland.

Australian 10-year yields will decline toward 2 percent by year-end, Shimomura said. An investor who bought Monday would earn 4 percent, according to data compiled by Bloomberg.

The market has returned 6.1 percent in the past year, versus 4.1 percent for Singapore, based on the Bloomberg World Bond Indexes.

This wouldn’t be the first time yields in the two countries converged. They inverted two times in 2015, though the shifts did not last.

Wage Growth

Though Australia is adding jobs, annual wage growth of 2.1 percent in the first quarter is the slowest on record, based on government data going back to 1998. The central bank this month cut its projection for underlying inflation in 2016 to a range of 1 percent to 2 percent. The previous forecast was for 2 percent to 3 percent.

Capital Asset Management in Tokyo is bullish on Australian bonds, and it’s also forecasting 10-year yields will drop to 2 percent by Dec. 31.

Singapore’s market is too small even if yields invert, said Toshifumi Sugimoto, the company’s chief investment officer, with 30 years of experience in fixed income. The city state has $153 billion of outstanding debt, compared with Australia’s $317 billion.

“Singapore yields, although higher, don’t offer much liquidity,” Sugimoto said. “The bond market is so small. In case of redemptions, we have to sell. We are very much concerned about liquidity. I’m interested in Australia.”

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