One of the big threats to the support offshore investors are giving the Australian dollar, bonds and other assets has been the compression of Aussie dollar interest rates with those in the US and other nations.
But after a recent marketing trip to visit clients in Asia, Martin Whetton, the ANZ’s senior rates strategist based in Sydney, says any fears of capital outflows and selling remain unfounded for the moment.
“Australian yields remain attractive relative to the average global yield,” Whetton wrote in a note outlining his takeaways from his recent trip. “There was an acknowledgment that the Australian market had compressed sharply over the course of the year, but could continue to offer a lower risk, liquid investment.”
The result of this is that “there was no pressing desire to divest AUD assets in an environment of low global yields,” Whetton said.
Whetton highlighted that one of the factors dampening any flight out of the Australian bond market was that while Australian bonds have compressed heavily toward their US counterparts, investors appear to switched out of sovereign bonds and into corporate debt. This has enabled them to stay long the Aussie dollar and pick up extra yield and thus return.
Interestingly, investors into Australian bonds appear to be chasing capital gains, not the simple yield pickup most observers would expect from fixed income managers.
“Bond investors recognise the tight levels Australia trades at against the US, but feel the RBA will continue to lower policy rates and thus deliver more capital gains,” Whetton said.
That focus flows from the reality that as RBA continues to lower rates, the spread might compress further but the capital gains made, as the rate on the bond falls and the price rises, delivers the bulk of any return to the investor.
Investors said they also like the liquidity available in local markets, aren’t too worried about the prospect of a rating downgrade which “would do little if anything to yields”, and believe the Aussie dollar will remain in a 75-80 cent range.
All in all, Whetton said, that means “Asian investors remain sympathetic owners of AUD assets via both fixed income and other assets”.
“The yield, political stability, and lack of alternatives regionally on a risk-adjusted basis are favourable.”