Bloomberg News

Bonds Match Longest Losing Streak Since Feb. 4: Australia Credit

October 12, 2011

Oct. 12 (Bloomberg) -- Australia’s three-year government bonds halted a five-day drop, which matched the longest losing streak since February and came on speculation the economic recovery’s resilience and a resolution to the European debt crisis will deter interest-rate cuts by the central bank.

The three-year yield rose six basis points, or 0.06 percentage point, to 3.71 percent yesterday, completing a climb from the 3.41 percent close on Oct. 4. The rate on 10-year notes increased 33 basis points to 4.33 percent over the same period, the biggest such advance since December 2009. The extra yield over similar-maturity Treasuries was 218 basis points today.

Investors pared bets the Reserve Bank of Australia will cut the developed world’s highest key rate as concern waned a Greek default would freeze credit markets. Australian consumer- spending growth and record exports are boosting confidence the nation can ride out global financial turmoil. Employers added 10,000 jobs in September, halting a two-month drop, economists said before an Oct. 13 report. The jobless rate likely held at 5.3 percent, compared with 9.1 percent in the U.S.

“The sell-off in bonds is long overdue and, as long as Europe can deal with its problems, risk-taking will come back and greed will take over from fear,” said Roger Bridges, who oversees the equivalent of $14.2 billion of debt as the Sydney- based head of fixed income at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “In Australia, the data has proved to be very resilient and you must question some of the basic market pricing at the moment.”

Three-year bond yields have risen for five days straight on three occasions since March 2010, when it rose for seven days.

Narrowing Gap

Australia’s longest maturity bond, due 2023, yielded 27 basis points less than the central bank’s key rate yesterday, the narrowest gap since Sept. 7. The rate has been below the 4.75 percent benchmark since Aug. 9.

The three-year rate snapped its five-day gain today and fell three basis points to 3.68 percent. The 10-year bond yield declined two basis points to 4.32 percent. It dropped below 4 percent on Oct. 4, the least since January 2009.

Equities worldwide surged since Oct. 5 amid speculation European leaders are discussing capital injections for banks, easing concern about a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. in 2008. A summit will be held Oct. 23 as the region gropes toward a master plan for dealing with Greece’s oversized debt, insulating Spanish and Italian markets, and shielding banks from any fallout.

Germany and France, Europe’s dominant nations, this week pledged a crisis-management breakthrough in time for a Nov. 3 meeting of Group of 20 leaders.

Risk-On

“There’s a risk-on environment so bonds have weakened as risk assets like the Australian dollar, commodities and equities climbed,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney. “The market had been pricing in a global recession and a credit freeze. Anything that falls short of that scenario is going to drive up bond yields.”

The Australian dollar, the world’s fifth most-traded currency, has risen 2.6 percent this month and traded at 99.17 U.S. cents as of 3:53 p.m. in Sydney. It reached $1.1081 on July 27, the most since it was freely traded in 1983.

Record Exports

RBA Governor Glenn Stevens has left interest rates unchanged for 11 months as policy makers wait to judge the impact of Europe’s debt crisis on the domestic economy.

“It will take more time for evidence of any effects of the recent European and U.S. financial turbulence on economic activity in other regions to emerge,” Stevens said after an Oct. 4 meeting. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

The same day, a statistics bureau report showed Australia’s exports surged in August to a record A$28.4 billion ($28.2 billion) on coal shipments. The RBA’s commodity price index, measured in Australian dollars and based on 18 major raw materials exported by the nation, rose to 115.4 in September, the highest since November 2008.

Business Confidence

The Reserve Bank has been saying "the consumer is voluntarily constrained rather than stressed, so that’s an important factor,’’ said Tyndall’s Bridges. “The danger is a rate cut could be worse than the symptom they’re trying to cure.”

The household savings ratio in Australia was 10.5 percent in the second quarter, down from the previous period’s 11.7 percent, which was the most since 2009.

Home-loan approvals rose in August for a fifth-straight month and consumer confidence extended its rebound from a two- year low, reports showed today.

The number of loans granted to build or buy houses and apartments gained 1.2 percent from July, when they rose a revised 1.9 percent, the statistics bureau said. Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers taken Oct. 3-8 showed the consumer sentiment index rose 0.4 percent. The gauge dropped to 89.6 in August, the lowest since May 2009.

Traders are betting Governor Stevens will reduce the key rate by 135 basis points over the next 12 months, down from 161 on Oct. 4, according to a Credit Suisse Group AG index based on swaps.

Futures contracts show the cash rate will be 4.43 percent in November, matching the highest expectation since Aug. 2. Three of 21 economists surveyed by Bloomberg News predict the RBA will lower rates to 4.5 percent at the next policy meeting on Nov. 1, with the rest expecting no change.

Inflation Estimates

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer prices will rise an average of 2.46 percent for the next five years, down from 2011’s peak of 3.14 percent on May 6.

Australia’s benchmark gauge of corporate bond risk rose. The Markit iTraxx Australia index increased 5.5 basis points to 207.5 basis points as of 3:45 p.m. in Sydney, Westpac Banking Corp. prices show.

The extra yield investors demand to hold Australian dollar- denominated corporate bonds instead of similar-maturity government debt fell to 248 basis points on Oct. 11, Bank of America Merrill Lynch index data show. That’s down from 249 on Oct. 6, the highest since August 2009.

--With assistance from Katrina Nicholas in Singapore. Editors: Garfield Reynolds, Edward Johnson

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


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