Aussie Yield Premium Vanishes as Funds Cautious on GDP Rebound

  • Spread over AAA rated peers approaches narrowest in four years
  • Yield within 10 basis points of record low even after GDP gain

Global fund managers say Australia’s disappearing yield premium and slumping currency are reasons to stay away from the nation’s bonds -- just as the government’s debt pile swells to a record.

The extra yield the nation’s 10-year bonds offer over the other AAA ranked government securities around the world shrank to 1.49 percentage points this week, approaching the narrowest level in four years. The yield tumbled to a record low of 2.20 percent in May, while its premium over Treasuries declined to 41 basis points last week.

Data this week showing the fastest economic growth since 2012, a recovery in business lending and surging Sydney home prices haven’t budged the bond market, with benchmark yields still less than seven basis points above the record low. Investors from outside Australia owned 61 percent of the nation’s long-term debt as of March 31, the smallest percentage since 2009, government figures showed this week.

“The current yield is not enough to hold for a long time, considering the volatility in the Aussie dollar,” said Park Sungjin, the head of principal investment in Seoul at Mirae Asset Securities Co., which oversees $7.54 billion. “If we take that kind of higher volatility, investors usually prefer the equity market or property, not fixed-income securities.”

Record Debt

Australia’s debt ballooned to an unprecedented A$465.3 billion ($337 billion) at the end of the first quarter, this week’s government figures showed, based on market value, meaning the nation has more at stake than ever if borrowing costs rise.

Ten-year bonds yielded 2.26 percent Thursday as of 12:30 p.m. in Sydney, dropping from 2015’s high of 3.2 percent set in June. The currency just suffered its worst losses in 10 months with a 4.9 percent decline in May.

The Reserve Bank of Australia drove the yield and the currency lower by reducing its policy benchmark last month, and interest-rate swaps indicate it will probably cut again by year-end. Two measures of inflation favored by the central bank have fallen to a record, as has wage growth.

For the latest on what’s driving Australia’s economic growth, click here.

While the decline in yield may deter future buyers, it has brought profits to current holders. Australia’s bond market has gained 4.2 percent this year, versus a 2.6 percent increase for all of 2015, based on the Bloomberg Australia Sovereign Bond Index.

Faster Growth

Ten-year yields declined one basis point on Wednesday even as the stronger-than-expected surge in gross domestic product growth was reported, as Asian stocks and commodities retreated after a Chinese manufacturing gauge failed to improve.

The Federal Reserve will probably raise interest rates this year, providing another reason to stay away from Australia, said Kei Katayama, a bond manager in Tokyo at Daiwa SB Investments, which has about $50 billion in assets.

“A Fed hike will help the dollar,” Katayama said. “Once the dollar rises, I think I will shift” from the Aussie and other currencies to the greenback, he said.

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