Yellen Inspiring Bears as Bonds Sync to U.S.: Australia Credit

Aug 25, 2014 6:37 pm ET

Aug. 26 (Bloomberg) -- Investors betting against Australian bonds are taking heart as the market listens as much to the U.S. Federal Reserve’s Janet Yellen as it does to local central bank chief Glenn Stevens.

Government debt due in 10 years and longer is moving in tandem with U.S. securities by the most since April. The correlation reached 0.926 at the end of last week, with a figure of 1 meaning they move in lockstep, according to an index compiled by Bloomberg and the European Federation of Financial Analysts Societies. The average is 0.797 over the past decade.

Stevens said last week the economy needs confidence rather than lower interest rates to stimulate growth, signaling Reserve Bank of Australia policy will probably remain unchanged. That leaves investors in the Australian market looking for guidance from the U.S., where Yellen said in Jackson Hole, Wyoming, on Aug. 22 that, with labor markets healing, Fed officials are shifting to debating when to reduce monetary stimulus.

“There’s more potential in the short term for there to be a market-moving event from the Fed than there is from the RBA,” said Bill Bovingdon, the chief investment officer at Altius Asset Management Pty in Sydney. “There’s more activity there. There’s more action,” he said by phone yesterday.

Rising Yields

Australian benchmark 10-year notes yielded 3.43 percent as of 5 p.m. yesterday in Sydney. A Bloomberg survey of economists’ predictions indicates the rate will rise 48 basis points to 3.91 percent by Dec. 31. Equivalent U.S. yields will advance 55 to 2.94 percent, a separate survey shows.

Bovingdon, who oversees the equivalent of about $510 million, predicts yields will approach 4 percent in Australia and 3 percent in the U.S. by Dec. 31, he said.

The Reserve Bank reiterated this month that the “most prudent course” for monetary policy is “likely to be a period of stability in interest rates.” Stevens said last week that spurring the economy requires “animal spirits” that policy makers can’t trigger, bolstering expectations he plans to keep the benchmark rate unchanged at a record low of 2.5 percent.

“I’ve allowed the horse to come to the water of cheaper funding. I can’t make it drink,” Stevens told a committee of lawmakers.

Traders are pricing in one basis point of reduction in the rate over the next year, according to swaps data compiled by Credit Suisse Group AG. A similar index shows traders are expecting the U.S. benchmark to rise 21 basis points.

Dialing Back

Yellen said U.S. central bankers are shifting to debating when “we should begin dialing back our extraordinary accommodation.” The Fed has kept its benchmark, the target for overnight loans between banks, in a range of zero to 0.25 percent since December 2008.

Bond rallies this year have thwarted analysts who projected yields would rise in the Bloomberg surveys. Aussie government securities have returned 5.7 percent in 2014, versus 4 percent for Treasuries, according to the Bloomberg World Bond Indexes.

Record-low yields in Europe now are disrupting Australia’s relationship with Treasuries, said Roger Bridges, the head of fixed-income strategy in Sydney at Tyndall Investment Management Ltd.

The reason is that plunging German yields are sending investors to Australia, providing a source of demand for the nation’s debt, he said. German 10-year yields this month fell below 1 percent for the first time ever.

Bunds Impact

“If U.S. rates did go up, it will obviously push Australia’s long end up,” Bridges said by phone yesterday. “But how far it will go up without bunds going at the same time is probably going to be very debatable. It must limit how we get impacted by U.S. rates.” Tyndall manages the equivalent of $22.4 billion.

Demand for Australian assets has pushed the local currency up 4.5 percent in 2014, the biggest gain among 16 major currencies tracked by Bloomberg against the dollar. The so- called Aussie traded at 93.21 U.S. cents yesterday in Sydney.

Ten-year yields will rise to 2.75 percent in the U.S. and to 3.55 percent in Australia by year-end, said Peter Jolly, head of research at National Australia Bank Ltd., the nation’s biggest lender as measured by assets.

“With the RBA on hold, the path particularly for longer- dated bonds is going to be driven more by global factors and Janet Yellen,” he said yesterday in a phone interview from Sydney. He sees “yields rising in Australia because of what’s happening in the U.S.”

--With assistance from Kristine Aquino in Singapore.