BT Investment Management Ltd. (BTT) is buying Australia’s government bonds, betting that forecasts that the nation’s economic expansion will top 3 percent this year are too high.
Australia’s economy may grow about 2.5 percent in 2012 as the government cuts spending, Vimal Gor, Sydney-based head of income and fixed interest at the Australian asset manager, said in an interview last week. That compares with a median forecast for a 3.4 percent expansion in a Bloomberg News survey of seven economists and a prediction of between 3 percent and 3.5 percent growth from the central bank in February.
“Australia is clearly slowing,” said Gor, who manages the equivalent of $13 billion. “We don’t know how there hasn’t been any downgrading in expectations over the last three months, given the data pulse has been materially weaker. There’s still value in Australian bonds.”
Yields (GACGB10) on benchmark 10-year notes, which rose as high as 4.35 percent on March 20, have since dropped amid concern that weakening growth in China and Treasurer Wayne Swan’s plans for record budget cuts will slow Australia’s economy. Reserve Bank of Australia Governor Glenn Stevens lowered borrowing costs in November and December to cushion the country against the global financial turmoil generated by Europe’s sovereign-debt crisis.
Traders are forecasting the RBA will lower its benchmark rate from 4.25 percent by 96 basis points, or 0.96 percentage point, over the next 12 months, according to a Credit Suisse Group AG index based on swaps. BT Investment expects at least 50 basis points of reductions, with as much as 100 basis points if the global economy deteriorates, Gor said.
Falling Australian Dollar
BT Investment is betting that the Australian dollar and euro will decline while the greenback will strengthen, Gor said. The so-called Aussie may fall to 95 U.S. cents, while the euro may reach $1.25, he said. The Australian currency traded at $1.0353 as of 8:20 a.m. in Sydney, while the euro bought $1.3057. Australian 10-year rates were at 3.83 percent at the end of last week.
Spanish yields, which reached euro-era highs in November, are surging as bank buying funded by European Central Bank loans runs out of steam. ECB Executive Board member Benoit Coeure suggested on April 11 that the bank could revive its bond- purchase program to reduce Spain’s borrowing costs.
“It feels quite clearly that the next leg of the European crisis is building now,” Gor said. “The focus has moved to Spain as we always knew it would do.” BT expects that the ECB will have to resume bond buying, he said.
BT Investment holds more Australian government bonds and less corporate debt than the benchmark it tracks. It’s buying infrastructure and utility bonds as they are likely to outperform as the economy slows, according to Justin Davey, a Sydney-based asset manager at the company.
Corporate bonds are “going to largely play second fiddle to the larger macro issues,” Davey said.
Australian utility bonds have returned 1 percent this month, compared with 0.5 percent on a broader gauge of corporate debt, according to Bank of America Merrill Lynch indexes. Government debt has handed investors a 1.2 percent gain.
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