Bloomberg News

New Zealand Economy to Surge as Aussie Falters: Australia Credit

September 14, 2011

Sept. 14 (Bloomberg) -- The economic outlooks for Australia and New Zealand are diverging the most in at least five years in the bond market.

Investors expect the central bank to boost New Zealand’s key interest rate 48 basis points within a year, the biggest forecast rise in the developed world, as the country rebounds from its deadliest earthquake in eight decades, Credit Suisse Group AG indexes show. Australia will make the biggest cuts by lowering borrowing costs 155 basis points, the data show. The 203-basis-point gap between the gauges is the widest since the indexes began in 2006.

New Zealand’s “growth is generally better balanced than in Australia and policy setting is more stimulatory,” said Jonathan Cunliffe, London-based head of global macro strategy at Aberdeen Asset Management Plc, which manages $298 billion worldwide. “We would have a preference for owning long-dated Australian government bonds versus their New Zealand counterparts.”

Australian and New Zealand bonds had the world’s best returns in U.S. dollar terms in the past year, as their governments use revenue from exports to China to target budget surpluses at a time when leaders from Washington to Rome are struggling to rein in debt burdens. Australia, the only developed nation to avoid recession over the past 20 years, faces its weakest jobs market since 2009. New Zealand last quarter had the strongest annual employment growth since 2007. JPMorgan Chase & Co. and 12 other banks say New Zealand rate rises this year will narrow the rates gap between the nations.

Rate Outlooks

Reserve Bank of New Zealand Governor Alan Bollard, 60, will leave the official cash rate at a record-low 2.50 percent tomorrow, according to all 15 economists surveyed Sept. 9 by Bloomberg News.

Australian central bank Governor Glenn Stevens, 53, kept borrowing costs unchanged on Sept. 6 for a ninth straight meeting at 4.75 percent, the highest in the developed world. Four of 24 economists expect him to cut rates this year, 19 estimate no change and Adam Carr of ICAP Australia Ltd. expects a 25 basis-point increase, according to a Sept. 13 survey.

A separate Credit Suisse gauge shows an 8 percent chance for an increase tomorrow, making Bollard the sole developed- world central bank governor markets judge may contemplate raising interest rates even as share markets plunge on concern Greece will default.

N.Z. Dollar Surges

The New Zealand dollar surged 12 percent over the past six months against its peers in the Group of 10 currencies, the strongest advance among Bloomberg’s Correlation-Weighted indexes. Australia’s rose 1.2 percent, the data show. New Zealand’s benchmark 10-year bond yield was 4.45 percent as of 5:21 p.m. in Sydney today, the most relative to its Australian counterpart in a year. The Australian note yielded 4.09 percent, or 212 basis points more than U.S. Treasuries.

Bollard signaled in July the nation’s strengthening economy may allow him to reverse the 50 basis-point cut he made in March to revive confidence after earthquakes struck the southern city of Christchurch, including a Feb. 22 temblor that killed more than 180 people, wrecking homes and closing the central business district.

Demand for New Zealand’s milk, wool and timber exports, is helping spur an economy that confounded the central bank by shrugging off the Christchurch disasters to expand in the first quarter at the fastest pace since 2009.

QIC, a Brisbane-based asset manager with about A$25 billion ($25.5 billion) of cash and fixed-income investments, has reduced holdings of New Zealand bonds that it added after the earthquake, said Susan Buckley, head of the firm’s global fixed- interest unit.

Australian Bonds

“Australia has been a far more liquid market for global investors to take their positions, whereas New Zealand suffers from the illiquidity aspect,” she said. “You don’t want to be the last one to exit long positions in New Zealand, that can hurt.”

The New Zealand dollar is the world’s 10th most-traded currency with $59.9 billion in average daily transactions. The government has the equivalent of $48.4 billion of bonds on issue, according to Bloomberg data.

Australia has $195.8 billion in sovereign debt outstanding and its currency is the world’s fifth most-traded, accounting for 7.6 percent of daily turnover in currency markets. Average daily transactions across currency spot, forward and swaps markets amounted to $280.7 billion in April 2010, compared with $331.8 billion for all other Asia-Pacific currencies excluding Japan, tracked by the Bank of International Settlements’ triennial survey.

Manufacturing Contrast

New Zealand manufacturing sales values have increased for seven straight quarters, the longest stretch since the period ending in June 2001, Statistics New Zealand reported yesterday.

Australia’s manufacturing and construction industries are showing the strains from the so-called Aussie’s climb to a record high and the RBA’s decision to raise interest rates on seven occasions between October 2009 and November 2010. Stevens said Sept. 7 policy makers have the flexibility to “maintain steady settings” while global markets are unstable.

The total of unemployed Australians rose for a fourth straight month in August, the longest stretch of advances since March 2009, when the global economy was falling into recession.

Corporate Spreads

The extra yield investors demand to hold Australian dollar corporate bonds instead of similar-maturity government debt surged 48 basis points this quarter to 225 and reached 227 on Sept. 12, the highest since 2009, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

The spread between Australia’s three-month bank bill yield and the rate to swap floating interest payments for fixed ones, a key gauge of banks’ reluctance to lend, was at 62 basis points today, up from 24.1 basis points on Dec. 31. A similar measure in New Zealand was at 36 basis points.

New Zealand’s gross domestic product will grow 2.5 percent in 2011, the first time the smaller nation’s economy has outpaced Australia since 2004, Bloomberg surveys of economists show. Australia will expand 1.84 percent, its second-slowest annual pace in the past two decades, the surveys show.

A rebound in exports after floods at the start of the year closed coal mines drove Australian GDP’s 1.2 percent growth in the second quarter, the statistics bureau said Sept. 7.

The contrasting outlooks have some of Asia’s biggest bond investors betting that the larger nation’s debt will overtake New Zealand’s as the developed world’s biggest gainers over the past year.

Best Bonds

New Zealand government bonds delivered a 24 percent return in U.S. dollar terms over the past year, including reinvested interest, the most among 21 developed nations tracked by Bloomberg and the European Federation of Financial Analyst Societies. Australian debt has climbed 22 percent.

“Australian bonds will rally,” said Sungjin Park, who heads the $58.1 billion debt division at Samsung Asset Management Co. in Seoul, South Korea’s largest private bond investor. “The economy is weakening and the central bank will consider easing.”

Park, who added to his holdings of the securities earlier this year, said Australian 10-year bond yields may fall to about 3.7 percent by year-end and drop another percentage point in 2012, while the currency will be sustained by foreign demand for the nation’s commodity assets and higher-yielding bonds.

Aussie Record

Australia’s dollar gained 8.8 percent against the U.S. currency in the past 12 months and bought $1.0222 as of 5:26 p.m. in Sydney. It reached $1.1081 on July 27, the most since exchange controls were scrapped in 1983. New Zealand’s dollar touched 88.43 U.S. cents on Aug. 1, the highest since it was freely floated in 1985.

Bond investors are estimating Australian consumer prices will rise at an annual 2.47 percent pace over the coming five years, down from this year’s high of 3.14 percent on May 6, according to the gap between indexed government debt and bonds that aren’t linked to inflation. That’s the highest among eight developed markets tracked by Bloomberg data.

Kei Katayama, who leads the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., has held a greater percentage of Australian investments than the benchmark he uses to gauge performance all year.

He trimmed his New Zealand holdings in August as the currency rose past levels that were justified by the pace of growth, he said. Daiwa manages 4.96 trillion yen ($64.5 billion) of assets.

“Australia’s economy is weakening relative to New Zealand’s, but we don’t expect Australia to slow down severely,” Katayama said. “Yields are attractive compared to other low-yield countries.”

--With assistance from Wes Goodman in Singapore and Dan Petrie in Sydney. Editors: Garfield Reynolds, Edward Johnson

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To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net.

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net.


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