Bloomberg News

TIPS Beating Australia Linkers for First Time Since 2009

December 27, 2012

Reserve Bank of Australia Governor Glenn Stevens

Glenn Stevens, governor of the Reserve Bank of Australia, cut the benchmark interest rate to a 50-year low of 3 percent this month. Photographer: Mark Graham/Bloomberg

Australian inflation-linked bonds are losing to their U.S. counterparts for the first time since 2009 as the South Pacific nation’s mining boom wanes while the Federal Reserve ramps up stimulus.

Treasury Inflation Protected Securities have returned 7.7 percent this year, versus 6.6 percent for Australian linkers, Bank of America Merrill Lynch data show. The gap between yields on U.S. 10-year notes and TIPS, a gauge of trader expectations for consumer prices, surged 51 basis points to 2.46 percentage points, while the similar spread widened 22 to 2.66 for Australia. The so-called breakeven rates drew equal to each other in September for the first time since 2005.

Reserve Bank of Australia Governor Glenn Stevens cut the benchmark interest rate to a 50-year low of 3 percent this month and the government abandoned plans to run a budget surplus as a fading mining boom saps economic growth. The Fed said it would let inflation go past its target as it expands bond buying to spur the economy, even after the jobless rate dropped to 7.7 percent in November, the lowest level since 2008.

“It wouldn’t surprise me to see other inflation markets start to outperform Australia,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “The U.S. economy is doing a little bit better, whereas the data in Australia have been pretty soft.”

Bond Performance

Government bonds that don’t protect against rising prices returned 2.3 percent in the U.S. and 5.1 percent in Australia this year, the Bank of America figures show.

Inflation-linked securities in both nations pay a lower yield than other debt. The principal value adjusts in tandem with gains in the consumer price index. The fixed interest rate is calculated based on the adjusted capital. At maturity, investors receive the adjusted capital value.

Stevens lowered borrowing costs by a quarter point on Dec. 4 to 3 percent, completing the sixth reduction since November 2011, the most aggressive series of rate cuts among developed nations.

The RBA’s favored gauges showed Australian consumer prices advanced about 2.5 percent in the third quarter from the year before, the middle of the central bank’s inflation target, data in October showed. The unemployment rate was 5.2 percent last month, after rising to 5.4 percent in September, the highest level since April 2010.

Expecting Pickup

Daiwa SB Investments Ltd., which manages the equivalent of $60.3 billion and is a unit of Japan’s second-largest brokerage, forecasts faster Australian growth that may boost prices. Australian linkers offered investors a 55 percent return since the start of 2008, beating the 48 percent gain for federal government debt not tied to inflation and the 42 percent advance for U.S. TIPS, Bank of America data show.

“By the end of 2013, inflation bonds could be good because I’m expecting some pickup in the economy,” said Kei Katayama, who buys non-yen debt in Tokyo for the company.

Fed Chairman Ben S. Bernanke has kept the U.S. benchmark at about zero since December 2008. The Fed announced Dec. 12 the central bank plans to buy $45 billion of U.S. government securities a month. It is already buying $40 billion of mortgage debt monthly.

Fed Rates

U.S. rates will stay low “at least as long” as unemployment is more than 6.5 percent and if inflation is projected to be no more than 2.5 percent, policy makers said in a statement. Consumer-price increases slowed to a 1.8 percent annual pace in November. The average for the past decade is 2.5 percent.

The Fed said in January it would target inflation of 2 percent. The Reserve Bank aims to keep cost increases in the economy in a range of 2 percent to 3 percent.

The Australian dollar has risen 1.7 percent this year to $1.0376 as of 2:34 p.m. in Sydney. Corporate debt in the nation returned 11 percent.

For Australia, which has benefited from selling commodities to China, the peak in investment in the industry “is approaching,” Stevens said in a statement this month.

Prime Minister Julia Gillard is also cutting spending as she tries to end budget deficits. Her government last week said a “sledgehammer” hit to revenue from declining commodity earnings means it must postpone plans to return to surplus.

Gross domestic product expanded in the three months ended Sept. 30 at the slowest pace in six quarters, government data showed this month. Australian business confidence plunged to the lowest level in November since April 2009, while job ads dropped for an eighth month, data this month showed.

RBA Outlook

The Reserve Bank will cut rates further in 2013, said Alvin Pontoh, a Singapore-based strategist at TD Securities Inc.

“Given the weak signals we’re seeing from various indicators, inflation is unlikely to break away from the target band,” Pontoh said. “It’s unlikely to be an issue for the RBA. There’s scope for a bit more policy easing.”

The central bank will reduce its benchmark to 2.75 percent in the middle of next year, Pontoh said.

That matches the median forecast from 25 economists surveyed Dec. 18 by Bloomberg News. Macquarie Bank, part of Australia’s biggest investment bank, had the lowest prediction at 2.25 percent, while eight forecasters picked 3 percent, the highest estimate.

“The mining boom is going to peak and unemployment is drifting higher,” said Peter Jolly, Sydney-based head of market research for National Australia Bank Ltd. “The RBA slashed rates through 2012, and because the inflation outlook remains benign, I expect they will cut further in 2013. I don’t think investors need to take out protection from higher inflation in Australia.”

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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


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