Treasury-Beating Aussie Bonds Lure Japan Funds With Cheap Hedges

(C) Reuters. Treasury-Beating Aussie Bonds Lure Japan Funds With Cheap Hedges

(Bloomberg) — Australia’s sovereign bond market is re-emerging as an attractive proposition for Japan’s yield-hungry investors.

A combination of superior yields and currency-hedging costs at a 17-year low is boosting the appeal of Aussie debt over Treasuries for Japanese funds, just when they are looking at ways to secure returns amid the virus-induced market turmoil. They have contributed to the record demand seen at Australia’s recent auctions.

“We view Australian sovereign bonds quite constructively and have started buying, including at last week’s sale,” said Akira Takei, a Tokyo-based global fixed-income money manager at Asset Management One Co. “Australia’s yield curve is outstandingly steep among developed nations, which makes the bonds attractive.”

The revival in demand from the typically long-term Japan funds comes as Australia vies for global investors to help fund the record stimulus measures taken to combat the economic fallout from the pandemic. Japanese investors last year turned net sellers of Aussie debt for the first time since 2013 amid risks related to the U.S.-China trade war.

However, latest figures from Japan’s Ministry of Finance show they bought a net 107.9 billion yen ($1 billion) of long-term Aussie debt in March, the biggest purchase since June 2019.

With Australia’s 10-year yield edging back up toward 1%, Japanese money flowing into the securities looks set to increase.

‘Stands Out’

The cost for yen investors to hedge their exposure to the Australian dollar sank to the lowest since 2003 this month. Ten-year Aussie bonds now offer Japanese funds a currency-hedged yield of about 48 basis points, versus 15 basis points on similar-maturity U.S. notes.

Australia last week sold A$19 billion ($12.4 billion) in new 10-year sovereign debt, a second record-breaking sale in as many months. At A$53.5 billion, bids received were also an all-time high.

“It’s easier for Japanese investors to buy at auctions as the cost is low at the time of the debt’s issuance,” said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp. in Tokyo. “The yield levels on Aussie bonds in tenors 10-year and longer are incomparably high.”

The support being lent to Aussie bonds by the Reserve Bank of Australia’s massive quantitative easing program is also encouraging investors to buy the debt.

“The huge number of bids at the Australian debt sale shows that debt monetization as a concept is accepted by investors, which means they will buy in positive-yielding markets before they turn negative,” said Asset Management’s Takei. “Investors can’t’ go wrong betting long in countries where the curve is steep. In that regard, Australia stands out.”

READ: Debt Monetization Creeps Closer to Global Investors’ Wary Relief

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