Photographer: Dallas Kilponen/Bloomberg

BlackRock Bullish on Aussie Company Bonds Amid Short Debt Allure

  • ‘Credit has just been a stellar performer,’ Vardy says
  • Expects U.S. market moves to spur steepening of Aussie curve

BlackRock Inc. is betting on Australian-dollar corporate bonds and shorter-dated debt in general Down Under as it guards against rising global interest rates.

The world’s largest money manager likes the extra yield company notes offer over sovereign notes and also sees them outperforming because of the lack of supply, according to local fixed-income head Craig Vardy. He predicted gyrations in the U.S. bond market will widen the premium that longer-dated debt offers locally over shorter-maturity peers, and the firm is favoring inflation-linked products.

While bonds around the world have taken a beating since the election of U.S. President Donald Trump in early November, corporates have offered a degree of protection as markets priced in the risks of an acceleration in consumer prices. An index of Australian-dollar company debt has gained 0.2 percent since Nov. 8, compared with a 1.1 percent loss for local sovereign securities.

“Credit has just been a stellar performer for a long period of time and, at least for the foreseeable future, we can’t see that changing,” said Vardy, who has been in charge since the retirement of former fixed-income boss Stephen Miller at the end of last year. “The thing we like about credit in our market is that the technical bid is so strong.”

Vardy, a 48-year-old whose investing career spans about a quarter of a century, said he likes bonds sold in Australia by technology companies, utilities, overseas financial firms and property trusts. His positions on local banks and state government debt are more neutral.

With Trump in the White House and the pace of Federal Reserve policy tightening uncertain, trading across global bond and currency markets has been difficult, Vardy said.

“You’ve got the long end of the curve being absolutely whipsawed by what’s happening in the U.S.,” he said.

RBA Anchor

Shorter-dated debt, on the other hand, is being anchored by the outlook for the Reserve Bank of Australia’s cash rate, which Vardy expects to remain unchanged at a record low 1.5 percent until next year. In Vardy’s view, the key risks to the RBA position stem from a potential overheating of the local property market and spillovers from any problems that might emerge in China, the country’s largest trading partner.

He also sees “a little more upside” to the Australian dollar. It could climb as high as 80 U.S. cents this year, he said. The currency was at 76.40 U.S. cents as of 5 p.m. in Sydney Friday, up 6 percent so far this year.

One risk looming for the Australian bond market is the precariousness of the nation’s sovereign credit rating. S&P Global Ratings has a negative outlook on the country’s AAA score, and Vardy said it could be downgraded after the May budget if the federal government fails to map out improvements that would return it to surplus by 2021.

While a downgrade might lessen the appeal of Aussie debt for some international investors, it might also prompt the government to take tougher actions to repair the nation’s budget situation, according to Vardy.

“It may give them a bit more room to move fiscally,” he said.