Bonds From Down Under Come Back on Property, Banking Rebound

(Bloomberg) -- The $125 billion U.S. dollar bond market Down Under is making a comeback, boosted by the recovering housing and banking sectors.

U.S.-currency notes issued by Australian REITs and mortgage asset firms are returning 9.1% this year compared with a 0.1% drop in 2018 as a rebound in property prices has gathered pace since June. Dollar bonds from the nation’s banking sector have made 8.4% compared with 0.2% last year. That comes after the surprise election victory of a government seen as friendly toward the industry, which also weathered a misconduct probe.

Two interest-rate cuts since June and an easing of lending rules to allow home buyers to borrow more have improved sentiment toward Australian bonds. Yield premiums on the country’s dollar notes have also tightened less than those on debt from Asia outside Japan this year, spurring investors to consider venturing beyond the region’s $766 billion U.S. currency note market and park their cash in Australian debt.

“The consolidation of the property market seems to have stabilized and in fact shows some signs of improvement,” said Arthur Lau, co-head of emerging markets fixed income and head of Asia ex-Japan fixed income at PineBridge Investments Asia Ltd.

Risks for Australian bonds include the subdued outlook for the economy, which is creaking under record household debt and stagnant wages. Economists are forecasting a 20% chance of recession within the next 12 months.

Dhiraj Bajaj, a Singapore-based portfolio manager at Lombard Odier, said bonds from big Australian banks provide better relative compared with peers.

Greenback bonds from Australia aren’t included in most Asia credit indexes. “Securities in the indices get bought up first by passive or semi-passive funds,” resulting in more unattractive valuations compared with off-benchmark picks, said Bajaj.

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