Some interesting ructions in Australian bond markets at the moment, which are massively factoring in cuts to interest rates by the RBA, thus feeding a frenzy for premiums elsewhere, just ast the cost of insuring corporate bonds is increasing.
Bloomberg reported this morning that:
a record A$38 bullion payout on maturing debt from Australian governments this quarter may support rallies in higher-yielding assets including corporate notes.
Of that amount, some $26 billion is Federal government debt of which more than 3/4 is being sought by foreign investors. With the government hell bent on returning to surplus, the expected stabiliser of a central bank to aggressively cut rates is being stuck into the murky debt market waters, as the AFR also reports:
Returning the budget back into surplus will make it easier for the central bank to cut interest rates, Prime Minister Julia Gillard says.
It was an “economic imperative” to deliver a surplus in the May budget “because we want to make sure that the Reserve Bank has the room to move should it choose to do so”, she told ABC Radio on Tuesday.
A budget surplus was in the interest of Australian businesses. “Australian businesses, many of them doing it tough because of the strong Australian dollar, have said to me that they would like to see an interest rate cut. So that’s one reason for returning the budget to surplus.”
It also would provide much-needed confidence during uncertain economic times.
“A great way of sending a signal of confidence about our economy to the world is returning the budget to surplus and we will,” Ms Gillard said.
Debt markets are now looking elsewhere for real premiums, particularly corporate bonds but the Market iTraxx Australia CDS index has risen again today, at its highest close since January 30:
Semi-government bonds (i.e from the States) are now attracting attention, as the listed corporate bond market in Australia continues to be weak and shallow. Although most of the funding required for the States for this year has been raised (albeit at higher spreads to Federal debt), there might be some more borrowing outside planned curtailment of both State and Federal spending programs and these “confidence signals” Why?
Look at the yield curve.
Tristan Cosgrove has picked up on this point in his blog (emphasis added):
Most majors nations have low yields but the 10 year is higher than the 3 month yield except for Australia. This might just be a temporary anomaly or driven by something else but the 3 month yield on Australian Government Bonds is 4.08% whereas the 10 year yield on Australian Government Bonds is 3.93% so there is an inverse yield right now of -0.15%.
Here’s the full curve from Bloomberg:
What does this usually presage? Back to Tristan:
In September 2006 the United States yield curve similarly inverted with the 3 month yield exceeding the 10 year yield presumably as bond investors expected a recession ahead and left the short end to invest into the longer dated securities so that if there was a recession and interest rates fell, the longer dated bond investors might profit the most.
Enough about China having a soft landing (we’ll find out later this week when Chinese GDP prints) – can the RBA walk the tightrope of managing interest rate cuts whilst governments pull in the spending reins at the same time as households continue to disleverage? The yield curve says no.