Overseas investors’ share of outstanding Australian Commonwealth Government Bonds (ACGBs) continues to fall with foreign holdings at their lowest level since Q2 2009, according to ANZ Research.
ANZ analysts Katie Hill, Martin Whetton, and Daniel Been say that while foreigners holding rose in absolute terms the overall share of total outstanding debt dropped to 59.4%. That’s the “eighth consecutive fall”, they say.
“Non-resident holdings of ACGBs rose in absolute terms to AUD284.1bn in Q2 2016 from AUD282.4bn. However, the rise appears to reflect valuation effects” Hill, Whetton, and Been wrote.
In fact they say “flow data suggests net foreign purchases declined in Q2 – the first decline since Q2 2013”. The amount of selling equated to “AUD2.3 billion for the quarter” the ANZ said.
The ANZ Research team isn’t about to read too much into one quarter’s numbers but notes that “in Q2, markets were preparing for the Brexit vote, which may have involved some portfolio de-risking, and the RBA had cut rates in May, delivering capital gains for investors”.
That said however, they believe foreign purchases as a percentage of the total stocks of Australian government debt will continue to fall in percentage terms.
That means the slack in funding the Australian government’s burgeoning debt issuance, will have to be taken up by domestic players: fund managers and the banking sector. That’s especially the case because “with the spread of ACGB 10 year to UST 10 year at fifteen year lows, Australian bonds could lose some lustre for foreign investors”.
But to the extent that more bonds available for investment means less reliance on self-generated liquidity for the banks under the RBA’s committed liquidity facility, there is local appetite for around another $200 billion (the rough size of the CLF) before issuance becomes a problem for the government.
Looking at the impact of the fall in foreign appetite for local bonds on the Australian dollar Hill, Whetton, and Been say “while the scale of the outflow observed is not significant enough to become a major issue for the AUD right now (particularly at a time when direct investment remains strong), it does serve as a reminder that flow into the AUD is not unidirectional”.
That’s all a polite way of saying the honeymoon looks over for the Aussie dollar and Australian debt. It means a plank of support for the Aussie dollar is being pulled away, and “direct investment inflows, which still remain robust, are becoming an increasingly important driver of the AUD to focus on,” the ANZ says.
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