Aussie Long Bond May Gain 24% If $480 Billion Fund Is Right
Aussie Long Bond May Gain 24% If $480 Billion Fund Is Right
(Bloomberg) -- Australia’s new long bond could provide investors with a gain of more than 24 percent within its first six months if a prediction by Japan’s Asset Management One Co. proves correct.
The Tokyo-based firm, which oversees more than 50 trillion yen ($480 billion), bought the 30-year note at last week’s sale and reckons additional Reserve Bank of Australia easing could drive the yield down to 2.25 percent by the end of March, according to global fixed-income fund manager Akira Takei. Australia last week priced A$7.6 billion ($5.8 billion) of the securities to yield 3.27 percent in its biggest-ever single sale of sovereign debt.
Almost two-thirds of the offering was snapped up by foreign buyers as a selloff in global debt markets drove the nation’s benchmark 10-year yield to a four-month high. While bets on further interest-rate reductions by the RBA have been scaled back, Takei thinks Governor Philip Lowe will cut in December or the first few months of 2017.
“Australia probably hasn’t ended its rate-cut cycle, and yields, including at the long end, may shift lower,” Takei said.
His call for a decline of more than a percentage point would deliver a 24 percent total return if achieved by the end of the first quarter, or 54 percent on an annualized basis, according to data compiled by Bloomberg. The yield on Australia’s new 30-year note, which doesn’t even settle until Oct. 19, had fallen to 3.24 percent as of 10:17 a.m. on Monday in Sydney.
“You have to purchase them in the primary market or pay a premium,” said Asset Management One’s Takei. “Liquidity in the secondary market has shrunk, as investors don’t sell bonds once they buy.”
About 6.2 percent of the March 2047 securities were purchased by Japanese investors, who often prize Aussie debt for the additional yield it offers over comparable securities elsewhere. In Japan, the rate on 30-year government notes was about 0.5 percent, while the rate for similar U.S. debentures was 2.56 percent.
Some Japanese buyers have tended to be more bullish than Australian analysts about the prospects for additional RBA easing. Just eight of 28 economists surveyed by Bloomberg on the central bank outlook are predicting that the RBA will lower its cash rate from 1.5 percent at the next policy meeting in November.
Quite Cheap
Hideo Shimomura, who helps oversee about $115 billion as chief fund investor at Mitsubishi UFJ Kokusai Asset Management in Tokyo, said the RBA is still in easing mode, although that’s not the reason he bought some of the 30-year notes.
“Yields have risen, and it’s a good chance to get into the market,” he said, although noted that he didn’t buy much due to a lack of liquidity. “The bonds are quite cheap.”
BNP Paribas SA strategist Altaz Dagha said in a note to clients on Friday that he expects the Australian 30-year bond to outperform its global peers.
Australian sovereign bonds have returned 5 percent so far in 2016, with notes due in more than 20 years climbing by 12 percent, the Bloomberg AusBond Treasury Index showed as of Oct. 13. The yield on the benchmark 20-year note has dropped 58 basis points since Dec. 31 to 2.87 percent at the end of last week.
As long as speculation of further easing by the RBA lingers in the market, it will weigh on yields, said Akihiko Tanabe, general manager of the global fixed-income investment department at Meiji Yasuda Asset Management Co.
“Australia’s sovereign yields have risen this month,” Tanabe said in an interview. “The spread over the U.S. has expanded, and investors’ search for higher yields is still underway.”
--With assistance from Wes Goodman To contact the reporters on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net, Yumi Teso in Bangkok at yteso1@bloomberg.net, Daisuke Sakai in Tokyo at dsakai2@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Andrew Monahan at amonahan@bloomberg.net, Jonathan Annells