July 14 (Bloomberg) -- Investors are trading a record amount of Australian interest-rate futures as the nation’s debt becomes a haven from Europe’s crisis and on bets the central bank will cut the developed world’s highest borrowing costs.
Transactions in the 30-day cash rate, the 90-day bank bill and three- and 10-year bond futures climbed in June to a daily average of 525,536 contracts, ASX Group said July 6. Australian government debt has gained 2.5 percent since June 1, including reinvested interest, the most among 20 developed markets tracked by Bank of America Merrill Lynch indexes. That compares with 0.6 percent for the U.S. and 1.7 percent for Germany.
Prime Minister Julia Gillard has pledged to return the budget to surplus by 2013 after borrowing increased by more than 60 percent since the end of 2009. The Australian dollar has appreciated 9 percent in the past 12 months, second to the Swiss franc, according to Bloomberg Correlation-Weighted Indexes, as investors sought alternatives to the U.S. and Europe, which are struggling to reduce their debt loads.
“The diversification flow into Australia is very clear,” said Jarrod Kerr, director of Australia rates strategy at Credit Suisse Group AG in Singapore. “The wilder it gets the more futures take over, since the good thing about the futures market is that it’s incredibly liquid.”
Portuguese bonds are the worst performers since June 1, according to the Merrill Lynch indexes, on concern Europe will be unable to contain the region’s debt woes. The Iberian nation’s debt generated a 16.8 percent loss for investors, followed by Ireland’s 14.9 percent drop and Italy’s 4.4 percent decline.
About 73 percent of Australian government debt is held by overseas investors, up from 63 percent in December 2009, according to data from the central bank and statistics bureau.
The International Monetary Fund forecasts Australia’s gross government borrowings will shrink to 21.8 percent of the economy in 2015 from 22.3 percent last year, giving it the second- smallest debt burden among developed nations, after Estonia’s 5.2 percent. The U.S.’s obligations will swell to 109 percent of GDP from 92 percent, and Germany’s will be at 74 percent.
Ireland joined Portugal and Greece this week as the third euro-area nation to have its credit rating reduced to below investment grade after Moody’s Investors Service cut it to Ba1 from Baa3. Ireland will probably need additional official financing and for investors to share in losses before it can return to the private market to borrow, Moody’s said.
Moody’s yesterday raised the pressure on U.S. lawmakers to increase the government’s $14.3 trillion debt limit by placing the nation’s credit rating under review for a downgrade.
The U.S., rated Aaa since 1917, was put on review for the first time since 1995 on concern the debt threshold will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes even though the risk remains low, Moody’s said in a statement yesterday.
Australian sovereign securities hold the top credit ratings from Standard & Poor’s and Moody’s.
“The Australian sovereign has very small net debt and a very small budget deficit, so if you give your money to the sovereign there’s almost no chance that you’re going to lose it,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “The strong currencies, such as the Swiss franc and Australian dollar, are the ones where the governments have very good finances.”
The U.S. dollar is an exception, given its status as the world’s primary reserve currency, Johnson said.
The Australian dollar, the world’s fifth-most traded currency, has gained 21 percent against the greenback and 8.8 percent against the euro in the past 12 months.
The so-called Aussie traded at $1.0738 as of 2:38 p.m. in Sydney. It will trade at $1.04 at the end of 2011, according to the median forecast of strategists surveyed by Bloomberg. The currency climbed to $1.1012 on May 2, the strongest since exchange controls were scrapped in 1983.
Australia’s benchmark 10-year bond yield fell to 4.91 percent yesterday, the least since Sept. 8, from this year’s high of 5.84 percent on Feb. 8. It was at 4.93 percent today.
Similar maturity Treasuries yielded 2.88 percent, or 2.05 percentage points less than Australia’s debt, down from 2.34 percentage points on June 1.
Two-year Australian yields dropped to 4.41 percent from 4.74 percent on June 30, headed for a third monthly decline.
Trading in 30-day cash rate futures rose to 885,640 contracts, a record monthly volume that was 8 percent higher than the previous peak set in May 2011. Transactions in 90-day bank bill futures climbed to 2,879,948 contracts for the month, 7 percent more than the previous high in August 2007, according to the ASX, which operates the Sydney Futures Exchange and the Australian Stock Exchange.
Futures volumes were lifted last month by a record A$31.1 billion ($33.4 billion) of Australian-dollar bonds that matured in June, said Brad Gibson, head of rates strategies at ING Investment Management in Sydney.
Federal and state governments repaid A$20.2 billion of local-currency debt, while A$10.9 billion of supranational, financial and company notes matured, according to data compiled by Bloomberg.
“Investors exposed to those securities would have to adjust their holdings, and often that happens first through the futures market,” said Gibson, who helps oversee about A$14 billion in fixed-income funds. “Driven by concerns about Europe we’ve seen a lot of volatility in interest rates.”
Volatility in shorter-maturity debt spurred trading amid changing expectations for the Reserve Bank of Australia’s next policy move, the Sydney-based ASX said July 6.
Traders are betting that RBA Governor Glenn Stevens will cut the benchmark rate to 4.42 percent by December from 4.75 percent. As recently as June 15, they were wagering on a 44 percent chance on an increase in the key rate to 5 percent.
The central bank left rates unchanged on July 5 for a seventh meeting and said the nation’s growth may be weaker than forecast. Stevens said in a statement the decision reflected slower global growth and Europe’s sovereign-debt crisis.
Australian consumer confidence fell by the most since Lehman Brothers Holdings Inc. collapsed in 2008, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers taken July 4-9 and released yesterday.
Homeowners are more pessimistic about the housing market as falling prices and slowing rental growth reel in growth expectations, according to a National Australia Bank Ltd. survey released today.
Home prices fell 2 percent in the second quarter and rental growth slowed to 1.3 percent, the largest lender said. Prices are expected to decline 1.4 percent over the next year, compared with growth of 0.5 percent predicted in a March quarter survey.
Consumer prices in Australia may rise an annual 2.81 percent in the next 10 years, according to the spread between yields on government notes and inflation-indexed securities. The RBA forecast in May that consumer prices will climb 3.25 percent this year.
The Markit iTraxx Australia index fell one basis point to 120.3 basis points in New York yesterday, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. It was little changed at 121.5 today, according to Deutsche Bank AG.
--With assistance from Sarah McDonald in Sydney. Editors: Rocky Swift, Nicholas Reynolds
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