Wall Street Journal: Aussie Bond Party Loses Its Mojo

Wall Street Journal
By Enda Curran


Is the Aussie bond party over?

That’s the question some investors down under are asking after new figures showed that foreign demand for Australia’s triple-A rated, high yielding bonds is starting to cool off, signaling that central banks and sovereign wealth funds have had their fill of the nation’s debt.

In a breakdown of third quarter balance of payments data J.P.Morgan JPM -0.66%strategist Sally Auld said net supply of Australian government bonds in the three months to Sept. 30 totaled 14.3 billion (US$15 billion), of which offshore buyers bought just 9% .

“Relative to recent outcomes, this is quite unusual,” said Ms. Auld. “While a couple of quarters may not be enough to define a trend, we would argue that this dynamic is broadly consistent with the idea that much of the new reserve allocation by offshore central banks and sovereign wealth funds into Australian dollar fixed income is now in the past,” the strategist said.

That means going forward, these buyers will be managing their existing allocations rather than looking to increase their exposure.

Foreigners now hold around 74.4% of Australia’s bonds on issue, down from a high of 79% in the first quarter of 2012, according to Ms. Auld.

J.P.Morgan says that Australia’s deteriorating fiscal position isn’t winning over many new buyers. The government in Canberra is pushing for a budget surplus this fiscal year by transforming a A$40 billion deficit into a small A$1 billion surplus but JPMorgan economists think the final outcome will be more like a A$15 billion deficit.

“This is probably a conservative estimate given downside risks to the growth outlook and lower commodity prices,” said Ms. Auld.

Still, it’s not all bad news for the sell side brokers who earn a crust by travelling the world and selling Aussie bonds to everyone from life insurers to reserve managers.

Ms. Auld notes a shrinking pool of triple-A rated sovereigns, the relatively high yields that Australia offers and ongoing buying by banks because of new prudential rules means that bonds from Down Under will remain sought after for some time, just not at record levels.