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Sept. 24 (Bloomberg) -- Australia’s government is betting investors will look past the worst-ever returns for the nation’s inflation-linked debt to buy its longest-dated bond as the world’s biggest central banks maintain unprecedented stimulus.
The Australian Office of Financial Management hired banks to manage a sale of the 2035 securities indexed to consumer- price changes even after such notes handed investors a 4.2 percent loss this year, heading for the only annual decline on record in Bank of America Merrill Lynch index data going back to 1997. U.S. Treasury Inflation Protected Securities have lost 7.8 percent since Dec. 31.
With the Federal Reserve maintaining asset purchases to stimulate economic growth, the Bank of Japan expanding its monetary base to revive inflation and China’s economy showing signs of recovery, protection against rising consumer prices retains appeal for some investors. A July sale of Aussie linkers received bids for nine times the notes offered, the highest ratio for any sale in AOFM data going back to 1982.
“Linkers might have performed not so well over the past six months, the flip-side to that is potentially that might mean they’re now quite good value,” said Tamar Hamlyn, a Sydney- based principal at Ardea Investment Management, which oversees the equivalent of $3.3 billion in funds that are primarily invested in inflation-linked bonds. “The fact that the Fed is going to be waiting for longer until their unemployment targets are achieved, that suggests there’s greater scope for inflation to be higher than it otherwise would have been.”
The yield on Australia’s 2030 indexed note, the longest- maturity federal bond outstanding, climbed 95 basis points this year to 2.02 percent, data compiled by Bloomberg show.
While the Fed on Sept. 18 left unchanged its outlook that the target U.S. interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, Chairman Ben S. Bernanke said the first increase may not come until the jobless rate is “considerably below” that level. The central bank also maintained the pace of its $85 billion of monthly asset purchases, after analysts had forecast a reduction.
“With that sort of backdrop, I think there will be increasing interest in inflation protection,” said Hamlyn. Ardea hasn’t decided whether to bid for the 2035 securities, he said.
The U.S. 10-year break-even rate, a measure of market inflation expectations over the coming decade, rose 13 basis points last week to 2.24 percentage points, the biggest gain since the period ended July 19. For Australia, it has fallen to 2.39 percentage points from 2.66 at the end of 2012.
The Reserve Bank of Australia, which aims to keep annual consumer-price gains between 2 percent and 3 percent on average, said in minutes of its most recent meeting it still has room to lower rates, suggesting inflation is not a concern for policy makers. The central bank’s key rate has been reduced to a record 2.5 percent as Governor Glenn Stevens seeks to buoy the slowing economy as its record mining boom crests.
Australian consumer prices climbed 2.4 percent in the second quarter from a year earlier, the government said July 24.
Swaps traders are betting that there is a 41 percent chance that the RBA will cut at least once more before the end of the year, according to data compiled by Bloomberg.
That’s limited the rise in three-year bond yields, which were at 2.83 percent yesterday from 2.67 percent on Dec. 31. The 10-year yield has risen 70 basis points this year to 3.97 percent. The Australian dollar has climbed 5.8 percent this month to 94.21 U.S. cents as of 5 p.m. yesterday in Sydney.
Bill Bovingdon, chief investment officer in Sydney at Altius Asset Management Pty, said he’s more concerned about the risk of interest rates rising than an outbreak in inflation and doesn’t plan to buy the securities.
“We wouldn’t dismiss the potential for some inflation risk down the track, but we just don’t see it in the immediate future,” said Bovingdon, who oversees the equivalent of $500 million. “We’re very mindful of the fact that they are very long duration instruments, and you certainly don’t want to be buying them without hedging that duration.”
The average duration of bonds in the Bank of America Merrill Lynch Australia Inflation-Linked Government Index is 7.33, compared with 5 for the gauge of unindexed notes. The nominal bond index has delivered a loss of 0.3 percent this year.
The longest Australian government securities currently on issue are the A$2.9 billion ($2.7 billion) of inflation-linked notes due in September 2030. The offering of the new linker, which would be the longest-tenor note brought to market since a 2020 indexed security was sold in 1996, is being managed by Bank of America Merrill Lynch, Deutsche Bank AG and Westpac Banking Corp. Australia has A$18.9 billion of linkers on issue.
The indexed security due February 2022 offered a yield of 1.52 percent yesterday, compared with 0.31 percent for the closest-maturity U.S. note and negative 0.38 percent for the U.K.
“Australia still offers very attractive real yields, a AAA rating, a stable government and a stable economy,” said Philip Brown, a fixed-income strategist in Melbourne at Commonwealth Bank of Australia, the nation’s largest bank.
--With assistance from Wes Goodman in Singapore. Editors: Garfield Reynolds, Jonathan Annells