Bloomberg News

Spread Widest to New Zealand in 18 Months on China

April 16, 2012

A pedestrian walks past the Reserve Bank of Australia (RBA) headquarters in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

A pedestrian walks past the Reserve Bank of Australia (RBA) headquarters in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

Slowing economic growth in China is turning into good news for investors in Australia’s government bonds, as benchmark yields drop to the lowest level compared with New Zealand debt in 18 months.

Australia’s 10-year yield fell to 3.80 percent yesterday, compared with 4.14 percent for similar-dated New Zealand notes, and the gap reached the widest since September 2010 last week, according to data compiled by Bloomberg. Australian debt returned 0.7 percent to investors this year, as New Zealand’s lost 0.3 percent, Bank of America Merrill Lynch indexes show.

While China is the biggest buyer from both countries, Australia depends on the world’s second-largest economy for 23 percent of its exports, compared with 12 percent for New Zealand. Policy makers in New Zealand are using record-low interest rates at 2.5 percent to foster a recovery from the nation’s deadliest earthquake in eight decades. The Reserve Bank of Australia signaled April 3 it may cut borrowing costs next month from 4.25 percent on concern growth is weakening.

“Rate cut expectations are obviously more aggressive in Australia than New Zealand, as the global economy, in particular China, has slowed down,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital in Sydney. “The Australian market has a lot more capacity to see borrowing costs moving lower, driven by the RBA, if the global economy is weak, given New Zealand already has very low interest rates.”

Yield Declines

The spread between benchmark yields for Australia and New Zealand widened to 37 basis points on April 13, according to data compiled by Bloomberg. Australia’s 10-year yield dropped 54 basis points from this year’s high of 4.35 percent reached March 20. That’s the biggest four-week decline since November 2011. The 15-year rate fell to as low as 4.07 percent yesterday, as all the country’s sovereign yields hold below the RBA’s cash- rate target.

New Zealand’s 10-year yield has climbed 40 basis points from a record-low 3.74 percent on Dec. 16.

Australian federal notes advanced 0.9 percent this month, the fifth-best performers among the 26 markets tracked by Bloomberg and the the European Federation of Financial Analysts Societies. That compares with a 0.4 percent gain for New Zealand’s securities.

Corporate Bonds

Elsewhere in Australia’s credit markets, the Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk rose six basis points this month to 153.2 on April 13, 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 securities instead of government debt has dropped 28 basis points this year to 264, according to Merrill Lynch data.

The gap between rates on sovereign bonds and inflation- linked notes show traders expect a 2.60 percent annual advance in consumer prices over the next decade.

Australia’s dollar, the world’s fifth-most traded currency, bought $1.0329 as of 5 p.m. yesterday in Sydney. The currency climbed 41 percent over the past three years and reached a post- float high of $1.1081 on July 27. The so-called Aussie was at NZ$1.2607 after falling to as low as NZ$1.2520 on April 13, the weakest level since Oct. 4.

The Aussie dropped 2 percent over the past month against its major peers, the worst performance among the 10 currencies covered by Bloomberg Correlation-Weighted indexes.

Biggest Cuts

Traders predict Australia’s key interest rate will decrease by 97 basis points within a year, the biggest reduction among the 10 developed central banks tracked by a Credit Suisse Group AG index. New Zealand’s will be up by 11 basis points, the data show.

RBA Governor Glenn Stevens signaled a willingness to lower borrowing costs after officials “judged the pace of output growth to be somewhat lower than earlier estimated.” The central bank is waiting for an April 24 report on consumer prices before deciding whether to lower rates, he said in a statement on April after the decision to leave borrowing costs unchanged.

“It looks like we’re going into some further modest easing of policy here,” said Tony Morriss, head of interest-rate research at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “Some of the data in Australia has been a little bit disappointing recently. It is also perceived to be far more exposed to growth in China, and there are concerns that the economy there is slowing.”

ANZ expects that the Chinese economy will remain robust this year, he said.

Trade Deficit

Growth in China, Australia’s biggest trading partner, slowed more than forecast to 8.1 percent in the three months through March 31 from a year earlier, the National Bureau of Statistics said last week. That’s the least in almost three years and compares with an 8.9 percent gain in the previous period.

Australia posted its second-straight trade deficit in February as exports declined. The number of loans granted to build or buy houses and apartments fell 2.5 percent in February from a month earlier, the biggest drop since March 2011, the statistics bureau said April 11.

Spending Cuts

Prime Minister Julia Gillard, whose government is slumping in opinion polls and faces an election next year, has pledged to end four years of deficits in the fiscal year that begins July 1, prompting concern that fiscal austerity will act as a drag on the economy.

In contrast, New Zealand’s NZ$20 billion ($16.4 billion) reconstruction of earthquake-devastated Christchurch is poised to bolster the labor market and construction.

The rebuilding of the nation’s second-biggest city after a February 2011 temblor killed 185 people may reach full pace as early as this year, increasing demand for workers, Finance Minister Bill English said April 12. House sales in the smaller South Pacific nation rose 25.3 percent in March from a year earlier, according to data yesterday from the Real Estate Institute of New Zealand. That’s the best monthly result since November 2007.

New Zealand’s economy will expand 3.4 percent in 2013, while Australia will probably grow 3.3 percent, according to the median forecasts in separate Bloomberg News surveys.

The RBA lowered its forecasts for growth and inflation in February. It sees average growth of 3.5 percent in 2012, down from its Nov. 4 estimate of 4 percent. Consumer prices will rise 3 percent in the year through to the fourth quarter, less than a previous prediction of 3.25 percent, the central bank said, while underlying inflation is predicted to be unchanged at 2.75 percent.

“The premise for the RBA leaving the cash rate at 4.25 percent was based on trend growth,” said Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities Inc. “If you have sub-trend growth and sub-trend inflation in Australia, therefore you should have accommodative monetary policy.”

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

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


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