Here's A Critical Part Of What's Driving Investment Managers' Demand For The Australian Dollar

The reasons to buy Aussie are coming thick and fast. Although a pullback is inevitable at some point, the reality is the preconditions for more investors placing their cash in Aussie dollar assets continue to grow.

Take for example this chart from the ANZ’s interest rate strategy team this afternoon – it fairly screams buy Aussie dollars and Aussie bonds.

The ANZ says:

Uncertainty over the US recovery and the likelihood that tapering now commences in 2014 puts ACGBs back into view especially for investors seeking yield and roll and carry.

Here’s why.

When you are an investment manager the risk you take to get your return is important in how your actual results are judged. That is, your “risk adjusted return” matters more than your absolute return. Or at least it should.

What the chart above shows is that currently the yield on Australia’s 10 year bonds is significantly higher than the rest of the small cabal of AAA rated countries. That means Australia is a best place to park your cash in the AAA sphere.

Australian 10 year bonds are the highest yielding AAA bond on the globe. Yields on Australian bonds are actually higher than those of significantly lower-rated countries like Italy and Spain, Thailand and The Philippines. This reinforces not only the fact that buyers will get a better nominal return, but a significantly better risk adjusted return.

So on a risk adjusted basis Australia is the place where any right-minded foreign bond fund investor would invest.

It’s just another reason why the Aussie dollar continues to confound most pundits and as you can see our cousins across the Tasman in New Zealand have a similar problem.

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