Bloomberg News

Bonds Lead N.Z. 1st Month in 4 as Rebound Slow: Australia Credit

July 27, 2011

July 27 (Bloomberg) -- Australian government bonds are outpacing New Zealand debt for the first time in four months on bets the smaller nation is more likely to raise interest rates.

Australian debt returned 1.7 percent since June 30, including reinvested interest, while New Zealand’s bonds gained 0.1 percent, according to Bank of America Merrill Lynch indexes. Australian securities rose 6.2 percent this year and its neighbor’s bonds climbed 6.3 percent, the most among 20 developed nations, as investors seek alternatives to the dollar amid concerns the U.S. may lose its AAA credit rating.

Investors are betting Bollard will hold the nation’s cash rate at a record-low 2.5 percent tomorrow and signal he is read to raise it on concerns New Zealand’s resurgence will boost inflation. His Australian counterpart Glenn Stevens is likely to delay to November any increase in the developed world’s highest borrowing costs, economists say, while futures show traders judge Stevens may hold interest rates unchanged.

Bollard faces pressure to “begin removing stimulus earlier than December,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “The longer the central bank hangs off, the greater the probability the economy builds a real head of steam, forcing inflation into the fast lane.”

Diverging Outlooks

Australian two-year borrowing costs fell this month while New Zealand’s climbed as the growth outlooks for the two nations diverge.

The rate to swap floating rates for fixed in Australia slid 16 basis points, or 0.16 percentage point, since June 30 to 4.885 percent as of 4 p.m. in Sydney, as slumping consumer and business confidence added to signs of economic weakness.

The rate jumped 15 basis points today after a report showed Australia’s second-quarter consumer price index rose 0.9 percent, faster than economists had forecast.

The equivalent New Zealand yield rose 30 basis points this month to close at 3.67 percent today as the nation’s rebound from Christchurch’s earthquakes quickened.

The spread contracted to 1.04 percentage points on July 22, the narrowest since Sept. 7.

Ebert forecasts quarter-point increases by the Reserve Bank of New Zealand in September, October and December.

Bollard last month signaled market expectations of a quarter-point rise in December were consistent with his estimations. Since then, economic indicators have been stronger than forecast, spurring traders to price in a 72 percent chance of an RBNZ quarter-point increase in September, according to swaps prices offered by Westpac Banking Corp. There is a 100 percent chance the benchmark will be 2.75 percent in October.

Reserve Bank of Australia Governor Stevens on July 5 kept the nation’s benchmark rate unchanged at 4.75 percent, where it’s been since November. Since that central bank meeting, private reports showed weaker business and consumer confidence.

Growth Moderating

The advance in the nation’s terms of trade, a measure of income from exports, has probably ended and as a result, any future growth in consumption is likely to be “moderate,” Stevens said in a speech yesterday in Sydney.

Australian households are saving more as assets including stocks and houses decline in value. A 21 percent rise in the local dollar in the past year, spurred by a surge in mining investment to meet demand from India and China, is hurting the manufacturing and tourism industries.

Record High

The so-called Aussie climbed to a post-float high of $1.1063 after today’s inflation report, which prompted investors to scrap bets Stevens will cut rates this quarter.

Rates futures show a 28 percent chance the RBA will lower borrowing costs to 4.5 percent by year-end, down from a 100 percent chance of a cut on July 25. September futures show a 2 percent possibility of a rate rise, from a 26 percent chance of a cut yesterday.

The benchmark 10-year Australian note’s yield rose four basis points to 4.98 percent, paring its decline this month to 23 basis points. New Zealand’s 10-year rate fell 1 basis point to 5.06 percent, little changed since June 30.

Economists expect Bollard to address the recovery in domestic demand when he announces his rate decision at 9 a.m. in Wellington tomorrow. Still, none of the 15 analysts in a Bloomberg News survey forecast a rate increase then. Five forecast an advance before December.

In a year, traders expect New Zealand’s cash rate will be 101 basis points higher, according to a Credit Suisse Group AG index based on swaps. A similar index shows investors expect Australia’s cash rate to be 19 basis points lower.

Emergency Cut

Bollard cut New Zealand’s cash rate by 50 basis points in March to revive confidence after an earthquake struck the southern city of Christchurch, killing more than 180 people, wrecking homes and closing the central business district.

Gross domestic product rose 0.8 percent in the first quarter, more than twice the central bank’s forecast for a 0.3 percent expansion, according to a report on July 14. Consumer prices climbed 1 percent in the three months through June, faster than Bollard’s 0.7 percent pick, a July 18 report showed.

By contrast, Australia’s economy shrank in the first quarter by the most in 20 years as floods in the state of Queensland hurt coal and other exports. From a year earlier, growth was 1 percent, lagging behind New Zealand’s 1.4 percent pace.

The RBNZ forecasts annual growth of 4.7 percent in 2012. The RBA predicted Australia’s economy would grow 3.75 percent next year, in its May Statement on Monetary Policy.

Bollard will likely wait to see more evidence of recovery, particularly in the labor and construction markets, and will want to be sure the global economy isn’t faltering before raising borrowing costs, said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland.

“We imagine that the RBNZ sees increased risk of weaker external demand,” said Gibbs, who expects no change in rates until December.

--With assistance from Daniel Petrie in Sydney. Editors: Garfield Reynolds, Nicholas Reynolds

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Rocky Swift at rswift5@bloomberg.net


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