Aussie Bonds’ Best Rally Since 2011 Sets Up Turnbull Growth Push

  • 05.Apr.2016
  • Candice Zachariahs and Benjamin Purvis,  Bloomberg

Prime Minister Malcolm Turnbull is signaling Australia’s path to a balanced budget will be built on growth not austerity. After the nation’s bonds delivered their biggest quarterly return in more than four years, debt investors are set to give him a warm reception.

Turnbull, a month out from the budget and facing an election as soon as July 2, signaled no plans to accelerate a return to the black in an interview on Sunday, saying fiscal restoration is a ‚Äúlong-term project.‚Ä̬†A surging¬†Australian dollarand bond yields that top those offered by most¬†developed-market¬†peers mean the prime minister has room to expand record government borrowing.Sovereign debt¬†returned 7.7 percent to U.S. dollar-based holders in the first quarter as the Aussie currency climbed to a nine-month high.

‚ÄúThis is an election budget and it will be interesting to see how far the government is able to shift the debate toward nation-building infrastructure spending and away from deficit reduction,‚ÄĚ said¬†Peter Jolly, head of market research at National Australia Bank Ltd. in Sydney. ‚ÄúGovernment borrowing costs have rarely, if ever, been lower than they are today. So if you are a government that has borrowing capacity, which Australia does, and has some productivity enhancing infrastructure that needs to be done, then this could be a very good time.‚ÄĚ

Lawmakers are weighing corporate tax cuts in an effort to jump-start growth as Australia’s decade-long mining and commodities boom draws to a close. The nation’s net debt is projected to peak at 18.5 percent of gross domestic product in 2017, lower than any Group of Seven economy, according to a presentation from the government’s official borrowing arm.

The following charts track Australia’s declining bond yields along with its growing stock of outstanding debt.

CHART 1: The yield on Australia’s 10-year bond has fallen even as the amount of outstanding debt climbs. The benchmark 10-year yield was 2.47 percent on Monday in Sydney.

Bigger Debt Cheaper Borrowing chart of Aussie 10 year bond

CHART 2: The budget update in December, the first under Turnbull and his Treasurer Scott Morrison, saw the government revise its fiscal projections and chart a slower return to balance than had been estimated under previous leader Tony Abbott.

Aussie bonds rally

CHART 3: Australia’s 10-year bond yield offers a 70 basis-point premium over comparable U.S. debt, while negative policy rates in Europe and Japan means Aussie debt looks even more attractive to investors in those regions.

Yield hunt chart - Australia's high yields continue to be a draw

CHART 4: Offshore investors held 63.5 percent of outstanding Australian government debt at the end of 2015, the least in six years. While down from a 2012 peak of nearly 76 percent, the share of international holdings remains high as Australia’s yields draw investors to the nation’s assets.

Coming off the boil - chart of offshore holdings waning but remaining high

By Candice Zachariahs and Benjamin Purvis.

Source: Bloomberg


  • 07Dec 2021

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