Australia’s benchmark bonds are set to deliver their worst losses on record to international investors, after a world-beating run over 15 years, as central bank interest-rate cuts send the currency tumbling.
Bonds due in 10 years and longer lost 15 per cent this year, after gaining 365 per cent from 1998 through 2012, based on data compiled by Bloomberg and the European Federation of Financial Analysts Societies. The run was the best performance of 144 debt indexes, driven by gains in the local currency against the US dollar. Australian debt lost the most after South Africa’s in 2013, with Spain and Ireland taking the top slots.
RBA Governor Glenn Stevens’ comment this week that there may be scope to trim interest rates further hasn’t been enough to support bonds as the Federal Reserve considers cutting debt purchases, forcing investors to reassess asset values globally. Rate reductions that brought the benchmark to a record-low 2.75 per cent also sent the Australian dollar down 13 per cent in the past three months, the biggest loss among 31 major currencies.
“We have taken a short position in the Aussie dollar,” said Park Sungjin, the head of asset management in Seoul at Meritz Securities. “The economic situation doesn’t look good.” Park said he’s avoiding the nation’s bonds as well as betting on currency declines.
RBA outlook
There’s a 79 per cent chance the Reserve Bank will lower its benchmark by least a quarter point by year-end, after leaving it unchanged on July 2, according to Bloomberg calculations based on swaps data.
Australia’s economy, which expanded through the global recession following Lehman Brothers Holdings Inc.’s 2008 collapse, grew at its slowest annual pace in almost two years in the first three months of 2013. Unemployment rose to 5.5 per cent in May from 5.2 per cent a year earlier.
Chinese demand for Australia’s commodities and the accompanying investment in the South Pacific nation’s mining industry has helped fuel growth. Prime Minister Kevin Rudd says that’s changing.
“The huge outstanding economic challenge for us is the end of the China resources boom,” he told reporters in Canberra on June 28. Manufacturing in Australia’s biggest trading partner expanded in June at the slowest pace in four months.
Aussie plunging
Australia’s dollar traded at 91.43 US cents. It fell to 90.37 US cents on July 3, the lowest since 2010. The currency may drop to 88 cents by year- end, Meritz’s Park said.
Credit Suisse Group AG, TD Securities and Bank of America Merrill Lynch are also predicting declines.
Credit Suisse said this week the Aussie will drop within 12 months to 75 US cents, a level not seen since May 2009.
TD lowered its December 31 forecast to 90 cents and said the central bank will cut interest rates this year, while Bank of America this week said the Aussie is likely to be at 89.
Declines in the Aussie may be hurting the foreign investors who own almost 70 per cent of the federal government’s securities.
“The weaker currency is certainly an element in bond performance,” said John Honan, chief economist at Ausbil Dexia. “I don’t think we’re going to see a significant rally in Australian bonds.”
Biggest loss
The 15 per cent loss for investors this year who own bonds maturing in 10 years or more exceeds any annual decline in Bloomberg and EFFAS data from 1992. Only South Africa performed worse since Dec. 31, with its similar debt falling 17 per cent.
Spanish long-term debt rallied 7.8 per cent, and Ireland's notes returned 7.3 per cent for this year’s best performances.
Australian 10-year bond yields have risen to 3.79 per cent from 3.27 per cent at the end of 2012. Bond prices, which move opposite to yields, are falling around the world as benchmark Treasuries tumble after the Fed said it may decide to reduce its debt purchases. Benchmark Australian yields will be at 4 per cent by year-end, Ausbil Dexia’s Honan said.
The Bloomberg US Treasury Bond Index has fallen 3.4 per cent in the past two months. Bloomberg’s Global Developed Sovereign Bond Index fell 6.2 per cent this year.
Chairman Ben S. Bernanke said on June 19 that policy makers may slow debt purchases this year if the economy achieves the sustainable growth the central bank has sought since the last recession ended in 2009.
Australia’s 10-year bond yields 1.24 percentage points more than same-maturity Treasuries, versus the average of 1.47 percentage points for the past 12 months.
“Globally, bonds have probably seen their best run,” said Darren Langer, head of portfolio management at Tyndall. “As far as the kind of returns we’ve seen over the last few years, that’s probably not going to happen.”