Goldman Asset says Australia stands out in a negative-rate world

by |

In a world of negative interest rates, the couple of percent you get for owning Australian bonds looks pretty appealing, according to Goldman Sachs Asset Management.

With almost a third of sovereign debt globally yielding less than zero, Australia’s positive benchmark rates and economic growth will probably support investor appetite for both the nation’s bonds and currency, said Philip Moffitt, the money manager’s head of Asia-Pacific fixed income. The prospect of further Reserve Bank of Australia monetary easing also makes the securities more attractive than those of the U.S., where policy is being tightened, he said.

“Australia stands out on a global basis,” Moffitt said in an interview in Sydney. “The currency’s going to be very well supported. Around this level, you get paid a couple of percent a year to own it and the domestic dynamics are reasonably good and so compared to other things it looks relatively attractive.”

Bond yields around the world have plunged this year as financial market turmoil spurred a rush for safer assets and the Bank of Japan followed its euro-area counterpart in experimenting with negative rates. While the RBA has signaled its reluctance to budge the cash rate from an already record-low 2 percent, it does have a bias to ease policy and markets are pricing in at least one quarter-point reduction in the next year.

RBA Cut?

GSAM, which supervises more than $1 trillion, had been betting toward the end of 2015 on an RBA cut, although with fixed-income markets having rallied as much as they have, the fund manager’s now removed some of those positions, according to Moffitt. That said, he still sees currency strength making an RBA cut likely and he’s positioned for the Australian debt market to do better on a relative basis than the U.S.

“We’d still want to be exposed to Aussie bonds, along the curve, but primarily at the short end, certainly on a relative basis,” he said.

The kinds of bonds he favors are those issued by Australian state governments and by supranational organizations, highly- rated securities that offer a bit more yield than Australian federal government debt. GSAM has also been selectively adding credit exposure as spreads look attractive, “but it’s not an all-out let’s get long call yet,” Moffitt said.

Australia’s benchmark 10-year bond yielded 2.52 percent as of 5 p.m. on Tuesday in Sydney, compared with just 1.79 percent for equivalent U.S. notes. In Japan, the 10-year rate last week dipped below zero for the first time, while in Germany sovereign bond rates are negative out to eight years.

Yield Premiums

The average yield premium over Aussie federal rates on a Bloomberg AusBond gauge of state bonds was about 40 basis points, while for an index of supranational and sovereign-backed notes it’s widened to 68 from last year’s low of 31.

The Australian dollar was at 71.47 U.S. cents on Tuesday, having rebounded from an almost seven-year low of 68.27 on Jan. 15. The median prediction in a Bloomberg survey of forecasters is for it to slide to 68 cents by the middle of 2016 after losing about a third of its value over three years.

Moffitt said he has positions that would benefit from an appreciation in the Aussie, though he wouldn’t characterize it as a “bullish” stance, rather expecting the currency to remain around the 70-cent level.

“We’ve basically got down to about 70 cents and stayed there for six months,” he said. “In that environment you’d get a resurgence in global demand for Australian assets.”