Bloomberg News

Gillard Growth Spurs Second-Worst Global Bonds: Australia Credit

October 16, 2011

Oct. 17 (Bloomberg) -- Australian bonds are falling by the most among developed nations outside of Portugal as signs the South Pacific country’s economic rebound is strengthening drive the steepest increase in inflation expectations since May.

Two-year bond yields climbed 42 basis points, or 0.42 percentage point, over the past month to 3.87 percent on Oct. 14. Only Portugal’s rates climbed more, surging 119 basis points amid concern a possible Greek default would impose losses on the creditors of other heavily-indebted European nations. Norway’s two-year yield climbed 39 basis points.

Speculation that the Reserve Bank of Australia will lower the developed world’s highest interest rates is fading after reports this month showed the jobless rate fell in September for the first time in six months, while business and consumer confidence improved. Global stocks gained by the most in more than two years last week after European leaders pledged to support banks and U.S. employers added jobs for a 12th month.

“The data here doesn’t justify any cuts based on domestic news and our view is the RBA will only cut if the worst outcome emerges from Europe,” said Darren Langer, head of portfolio management at Tyndall Investment Management Ltd., where he helps oversee A$15 billion ($15.5 billion) in fixed-income assets. “The U.S. will not go into a double-dip recession and Europe will sort itself out eventually.”

Debt Losses

Australian government debt lost 0.9 percent this month, paring the gains that made the securities the developed world’s best performers in the 12 months ended Sept. 30.

The nation’s bonds returned 9.6 percent over the past four quarters, surpassing all 25 other markets tracked by Bloomberg/EFFAS indexes, as Prime Minister Julia Gillard’s pledge to return the budget to surplus bolstered confidence among fixed-income investors.

The two-year rate rose 11 basis points to 3.97 percent today. Benchmark 10-year government bond yields climbed 13 basis points to 4.56 percent, set for the highest close since Aug. 10. It advanced 19 basis points last week and 42 since Sept. 23, completing the biggest three-week gain since the period ended Oct. 23, 2009.

Traders reduced to a more than two-month low bets that the RBA will cut its benchmark rate from 4.75 percent.

Rates Bets

Futures contracts show the cash rate will be at 4.36 percent by December, the highest expectation since Aug. 2, and up from as low as 3.47 percent on Aug. 9. 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.

Australia’s unemployment rate declined last month for the first time since March as employers added double the workers economists forecast, a report showed Oct. 13. The number of people employed rose by 20,400 and the jobless rate fell to 5.2 percent from 5.3 percent, the statistics bureau said.

A National Australia Bank Ltd. survey of more than 400 companies released Oct. 11 showed that business confidence strengthened last month by the most since January. A Westpac Banking Corp. report published the following day showed consumer confidence rose for a second month. Retail sales increased more than economists forecast for a second-straight month in August, separate data showed Oct. 5.

The gap between yields on Australian government bonds and inflation-indexed notes shows investors estimate consumer prices will rise an average of 2.52 percent for the next five years, up from 2011’s low of 2.37 percent on Oct. 4. Last week’s 10 basis- point advance was the biggest since the five days to May 6.

“The generally better tone of domestic data has added to the risk-on sentiment globally,” said Joshua Williamson, a senior economist at Citigroup Inc. in Sydney. “The market has priced out some of its more extreme interest-rate expectations for the next 12 months.”

Bank Recapitalization

RBA Governor Glenn Stevens has left borrowing costs unchanged for 11 months as policy makers wait to judge the impact of Europe’s debt crisis on a domestic economy that benefits from its commodity exports to China and India. Stevens signaled Oct. 4 that lower inflation would give the RBA more scope to ease monetary policy “should that prove necessary.”

Bonds dropped after German Chancellor Angela Merkel and French President Nicolas Sarkozy put recapitalization of the euro-region’s banks at the top of the priority list in a joint declaration in Berlin this month as Greece edges closer to default. Sarkozy said they would deliver a plan by the Group of 20 meeting on Nov. 3.

German Banks

German banks are preparing for losses of as much as 60 percent on their Greek holdings, three people with knowledge of the matter, who declined to be identified because the talks are private, said Oct. 13.

“We see yields continuing to rise in Australia, given our view that the U.S. is still in a slow recovery phase and Europe will muddle through as politicians there come up with a plan,” said Anthony Kirkham, head of investments at Western Asset Management Co. in Melbourne, where he helps oversee A$13 billion. “The RBA won’t be easing policy aggressively -- in fact there’s a good chance they won’t do anything at all if the European leaders get their act together.”

Kirkham expects yields to rise on shorter-maturity sovereign debt, with three-year yields gaining toward the RBA’s cash rate.

CDS Slide

Perceptions of Australian corporate creditworthiness improved for a second week.

The Markit iTraxx Australia index dropped 6.4 basis points to 189 on Oct. 14 , the lowest since Sept. 19, according to CMA prices. The index decreased in back-to-back weeks for the first time since April, the data show. It dropped 3.5 basis points to 187.5 as of 10:06 a.m. in Sydney, according to Deutsche Bank AG.

Contracts on QBE Insurance Group Ltd. fell the most of any Australian firm last week, tumbling 73 basis points to 352, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The extra yield investors demand to hold Australian corporate bonds instead of government debt shrank 4 basis points to 246 on Oct. 14, the sharpest contraction in almost a month, according to a Bank of America Merrill Lynch index.

Credit-default swap indexes are benchmarks for protecting bonds against default, and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Aussie Surges

The Australian dollar, the world’s fifth-most traded currency, climbed 5.9 percent last week to $1.0340, the biggest five-day advance since February 2009. It traded at $1.0319 at 11:40 a.m. in Sydney and reached $1.1081 on July 27, the most since it was freely floated in 1983.

The MSCI All Country World Index of shares climbed 5.4 percent, the most since the week ended July 17, 2009.

A string of stronger-than-projected U.S. economic statistics -- capped by the news on Oct. 7 of a 103,000 rise in payrolls last month -- prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their forecasts for third quarter American growth to 2.5 percent from about 2 percent. That’s nearly double the second quarter’s 1.3 percent rate and would be the fastest expansion in a year.

Retail sales rose in September by the most in seven months, showing American consumers are helping the world’s largest economy fend off a slump. Purchases grew 1.1 percent, exceeding the median forecast of economists surveyed by Bloomberg News for a 0.7-percent gain, Commerce Department data showed Oct. 14.

“U.S. economic numbers continue to show strength, and there’s also renewed optimism that the EU will provide a definitive solution to the crisis in a few weeks time,” said Jason Watts, National Australia Bank’s Sydney-based head of credit trading. “We’ve seen a revisit of the risk-on trade.”

--Editors: Garfield Reynolds, Ed Johnson.

To contact the reporters on this story: Candice Zachariahs in Sydney at; Sarah McDonald in Sydney at

To contact the editor responsible for this story: Rocky Swift at

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