Morgan Stanley Says Buy Australian Bonds, Sell the Currency

(Bloomberg) -- Australian bonds are a buy because the central bank will keep interest rates at a record low for at least the next six to 12 months, according to Morgan Stanley Investment Management Inc. The company is underweight the Aussie dollar for the same reason.

“The RBA is the furthest away from hiking rates amongst any industrialized countries,” Michael Kushma, chief investment officer for global fixed income, said in an interview in Singapore. “That could allow Australian bonds to continue to do well versus U.S. bonds and other Group-of-10 government bonds.’’

While the Reserve Bank of Australia will probably stay on hold for the rest of this year, the Federal Reserve is going to increase its benchmark rate at least three times over the next 12 months to 2.5 percent, said Kushma, who helps oversee $80 billion for the New York-based asset manager.

“The domestic economy in Australia is not doing well enough,” he said. “The labor market is not doing well enough. Wages are not doing well enough. The housing market is having troubles at the moment now. So the RBA is not going to raise rates.”

Australia’s bonds have outperformed most developed-nation debt this year, staying little changed, even as Treasuries have slumped 2.5 percent, according to data compiled by Bloomberg. The South Pacific nation’s benchmark 10-year note yields 2.88 percent, 15 basis points below their U.S. peers, compared with an average premium of 68 basis points during the past five years.

Kushma said he dislikes Australia’s currency for the same reason he favors its bonds.

Australian short-term interest rates are below those in the U.S., he said. “You pick up yield by selling the Australian dollar for the U.S. dollar, you actually earn incremental yield. It’s the cheapest it’s ever been to sell the Australian dollar today.’’

Buying the Aussie against the U.S. dollar in the spot market and simultaneously selling the pair via three-month forwards yields 16 basis points on an annualized basis, according to calculations based on data compiled by Bloomberg.

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