ASIAN and South American central banks are becoming major buyers of Australian government bonds in a move to diversify their US investments, which is driving demand for the Australian dollar.
Despite reverses in the Aussie yesterday amid volatility in foreign exchange markets due to Greek debt fears, analysts said fundamentals backed the dollar.
Merrill Lynch-Bank of America's head of currencies and fixed income in Australia, Chris Thomas, said the yield on federal government bonds and the supply of state government debt was fuelling the central banks' interest.
Mr Thomas said 10-year Australian government bonds yielded 225 basis points above their US counterparts, with two-year paper yielding 425 basis points above similar US paper. "People . . . feel the US dollar is quite cheap and has been under pressure," he said. "Diversification continues apace and the Australian and Canadian dollars and the euro are at or near multi-year highs against the US dollar.
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"(But) the yield spread that is available on two-year Aussie bonds and 10 years continues to support investments in Australian government, state government and corporate bonds."
The higher demand for Australian debt flows through to the dollar, as the central banks buy the currency to fund the securities.
Mr Thomas said Australian state and federal governments were expected to issue another $96 billion in new debt in the coming financial year, which was providing a good source of high-quality government-backed paper for the foreign central banks.
About half of this is expected to be raised by the federal government with the rest coming from the states. Mr Thomas said the purchases of Australian government paper by central banks and sovereign wealth funds was a more long-term investment than opportunistic currency trading.
"'It is broadly supportive of the currency . . . and it is a continuing process of diversification that will benefit the currency and our local debt markets."
Mr Thomas's comments come amid greater talk about the interest of foreign central banks and wealth funds in investing locally.
Rob Mead, a managing director and portfolio manager with Pimco, estimates that up to a third of Australian government bonds are already held by central banks looking to diversify their holdings away from the US dollar. "Central banks and sovereign wealth funds have continued on their path to diversify their reserves, with Australian bonds seemingly a popular choice for diversification," he said in a recent report to clients.
Deutsche Bank estimates nearly 80 per cent of Australia's $170bn worth of commonwealth bonds is now owned by foreign interests compared with 64 per cent before the global financial crisis.
Citi's chief economist, Paul Brennan, said Russia's move to buy up to $US5bn of the Australian dollar from September was likely to prompt interest from other central monetary authorities. "There's the pull factor from the Russian central bank's decision to spend up to $US5bn buying Australian dollars. And there's the push factor from the US with a weak outlook for the US dollar."
Royal Bank of Scotland chief economist Kieran Davies said Australia had become more popular with overseas central banks in the last couple of years.
Source: www.theaustralian.com.au
Despite reverses in the Aussie yesterday amid volatility in foreign exchange markets due to Greek debt fears, analysts said fundamentals backed the dollar.
Merrill Lynch-Bank of America's head of currencies and fixed income in Australia, Chris Thomas, said the yield on federal government bonds and the supply of state government debt was fuelling the central banks' interest.
Mr Thomas said 10-year Australian government bonds yielded 225 basis points above their US counterparts, with two-year paper yielding 425 basis points above similar US paper. "People . . . feel the US dollar is quite cheap and has been under pressure," he said. "Diversification continues apace and the Australian and Canadian dollars and the euro are at or near multi-year highs against the US dollar.
Start of sidebar. Skip to end of sidebar.
End of sidebar. Return to start of sidebar.
"(But) the yield spread that is available on two-year Aussie bonds and 10 years continues to support investments in Australian government, state government and corporate bonds."
The higher demand for Australian debt flows through to the dollar, as the central banks buy the currency to fund the securities.
Mr Thomas said Australian state and federal governments were expected to issue another $96 billion in new debt in the coming financial year, which was providing a good source of high-quality government-backed paper for the foreign central banks.
About half of this is expected to be raised by the federal government with the rest coming from the states. Mr Thomas said the purchases of Australian government paper by central banks and sovereign wealth funds was a more long-term investment than opportunistic currency trading.
"'It is broadly supportive of the currency . . . and it is a continuing process of diversification that will benefit the currency and our local debt markets."
Mr Thomas's comments come amid greater talk about the interest of foreign central banks and wealth funds in investing locally.
Rob Mead, a managing director and portfolio manager with Pimco, estimates that up to a third of Australian government bonds are already held by central banks looking to diversify their holdings away from the US dollar. "Central banks and sovereign wealth funds have continued on their path to diversify their reserves, with Australian bonds seemingly a popular choice for diversification," he said in a recent report to clients.
Deutsche Bank estimates nearly 80 per cent of Australia's $170bn worth of commonwealth bonds is now owned by foreign interests compared with 64 per cent before the global financial crisis.
Citi's chief economist, Paul Brennan, said Russia's move to buy up to $US5bn of the Australian dollar from September was likely to prompt interest from other central monetary authorities. "There's the pull factor from the Russian central bank's decision to spend up to $US5bn buying Australian dollars. And there's the push factor from the US with a weak outlook for the US dollar."
Royal Bank of Scotland chief economist Kieran Davies said Australia had become more popular with overseas central banks in the last couple of years.
Source: www.theaustralian.com.au
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