Foreigners aren't buying Australian government bonds like they used to

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Foreign holdings of Australian Commonwealth government bonds (ACGB) continued to slide in the final three months of 2016, dropping to 55% of the total outstanding stock, according to ANZ.

“Non-resident holdings of ACGBs fell in absolute terms by $12.6 billion to $277.4 billion in Q4 2016,” said bank strategists Martin Whetton, Katie Hill and Daniel Been

Source: ANZ

According to ANZ, the decline entirely reflected valuation effects as a result of higher yields and a weaker Australian dollar, noting that non-resident net purchases actually rose by $2.2 billion during the quarter.

Whetton, Hill and Been say this modest increase in net purchases “is broadly consistent with the slower pace of purchases in 2016”, and will likely continue in the year ahead, thanks in part to a narrowing in spreads between Australian and US government debt.

Source: ANZ

“We expect foreign purchases are unlikely to keep up with supply and non-resident holdings should continue to decline as a percentage of the overall stock of ACGBs,” they said.

“The AOFM’s [Australian Office of Financial Management] borrowing task for 2017-18 is likely to remain significant while foreign purchases have slowed substantially, amounting to an average $1.8 billion per quarter in 2016 compared to $7.1 billion per quarter in 2015.

“With the spread of ACGB 10-year to UST 10-year having narrowed significantly to around 35 basis points currently, Australian bonds could lose some lustre for foreign investors.”

Given the slowdown in purchases from non-residents, normalising to levels seen before major central banks rolled out vast quantitative easing programs in the wake of the global financial crisis, the ANZ says that may also detract away from demand for Australian dollars as well.

“While the current pace of foreign purchases is not a negative for the currency, it no longer justifies a positive risk premium in the currency,” it says.

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